10-K 1 f10k2012_intercloud.htm ANNUAL REPORT f10k2012_intercloud.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

or

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _____________

Commission file number: 001-32034

InterCloud Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware
65-0963722
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)

2500 N. Military Trail, Suite 275
Boca Raton, FL 33431

(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s telephone number:  (561) 988-1988

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:  common stock, par value $0.0001
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨      No   x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes   ¨      No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.  Yes x      No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x      No   ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  o
Do not check if a smaller reporting company
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨       No   x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $346,144 as of June 30, 2012, based on the closing price of $0.425 of the Company’s common stock on such date.
 
The number of outstanding shares of the registrant’s common stock on March 28, 2013 was 2,799,565.
 
Documents Incorporated by Reference:  None.
 
 
 

 
 
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 2012

TABLE OF CONTENTS
 
       
PAGE
         
Item 1.
 
Business.
  4
Item 1A.
 
Risk Factors.
  12
Item 1B. 
 
Unresolved Staff Comments. 
  25
Item 2.
 
Properties.
  25
Item 3.
 
Legal Proceedings.
  26
Item 4.
 
Mine Safety Disclosures. 
  26
         
PART II 
       
Item 5.
 
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 
  27
Item 6. 
 
Selected Financial Data 
  28
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
  28
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk. 
  44
Item 8.
 
Financial Statements and Supplementary Data.
  44
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  44
Item 9A.
 
Controls and Procedures.
  44
Item 9B. 
 
Other Information.
  45
         
PART III
       
Item 10.
 
Directors, Executive Officers and Corporate Governance.
  46
Item 11.
 
Executive Compensation.
  49
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
  52
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence.
  54
Item 14.
 
Principal Accountant Fees and Services.
  55
         
PART IV
       
Item 15.
 
Exhibits, Financial Statement Schedules.
  56
         
SIGNATURES
  57
EXHIBIT INDEX
  58
FINANCIAL STATEMENTS
  F-1
  
 
 

 
 
FORWARD-LOOKING STATEMENTS

The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements”. Forward-looking statements can be identified by the use of forward-looking terminology, such as  "anticipate", "believe", "expect", "plan", "intend", "seek", "estimate", "project", "could", "may" or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report including in “Risk Factors” in Item 1A and some of which are discussed in our other filings with the SEC. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.

These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.

Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock.  If we are ever considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Unless otherwise noted, “we,” “us,” “our,” and the “Company” refer to InterCloud Systems, Inc. and its predecessors and consolidated subsidiaries, including Rives-Monteiro Leasing, LLC, Rives-Monteiro Engineering, LLC, ADEX Corporation, ADEX Puerto Rico, LLC, ADEXCOMM Corporation, T N S, Inc., Tropical Communications, Inc. and Environmental Remediation and Financial Services, LLC
 
 
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PART I

ITEM 1.        BUSINESS

Overview

We are a global single-source provider of value-added services for both corporate enterprises and service providers.  We offer cloud and managed services, professional consulting services and voice, data and optical solutions to assist our customers in meeting their changing technology demands.  Our cloud solutions offer enterprise and service-provider customers the opportunity to adopt an operational expense model by outsourcing to us rather than the capital expense model that has dominated in recent decades in information technology (IT) infrastructure management.  Our professional services groups offer a broad range of solutions, including application development teams, analytics, project management, program management, telecom network management and field services.  Our engineering, design, installation and maintenance services support the build- and operation of some of the most advanced enterprise, fiber optic, Ethernet and wireless networks.

We provide the following categories of offerings to our customers:

 
Cloud and Managed Services.  Our cloud-based service offerings include platform as a service (PaaS), infrastructure as a service (IaaS), database as a service (DbaaS), and software as a service (SaaS). Our extensive experience in system integration and solutions-centric services helps our customers quickly to integrate and adopt cloud-based services. Our managed-services offerings include network management, 24x7x365 monitoring, security monitoring, storage and backup services.
 
 
Applications and Infrastructure.  We provide an array of applications and services throughout North America and internationally, including unified communications, interactive voice response (IVR) and SIP-based call centers.  We also offer structured cabling and other field installations.  In addition, we design, engineer, install and maintain various types of WiFi and wide-area networks, distributed antenna systems (DAS), and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers. Our services and applications teams support the deployment of new networks and technologies, as well as expand and maintain existing networks.  We also design, install and maintain hardware solutions for the leading OEMs that support voice, data and optical networks.
 
 
Professional Services.  We provide consulting and professional staffing solutions to the service-provider and enterprise market in support of all facets of the telecommunications business, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services.  We leverage our international recruiting database, which includes more than 70,000 professionals, for the rapid deployment of our professional services.  On a weekly basis, we deploy hundreds of telecommunications professionals in support of our worldwide customers.  Our skilled recruiters assist telecommunications companies, cable broadband MSOs and enterprise clients throughout the project lifecycle of a network deployment and maintenance.
 
Our Recent and Pending Acquisitions

We have grown significantly and expanded our service offerings and geographic reach through a series of strategic acquisitions.

Since January 1, 2011, we have completed the following acquisitions:

 
ADEX Corporation.  In September 2012, we acquired ADEX Corporation, a New York corporation (“ADEX”), an Atlanta-based provider of engineering and installation services and staffing solutions and other services to the telecommunications industry.  ADEX’s managed solutions diversified our ability to service our customers domestically and internationally throughout the project lifecycle.
 
 
T N S, Inc.  In September 2012, we also acquired T N S, Inc., an Illinois corporation (“T N S”), a Chicago-based structured cabling company and DAS installer that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures.  T N S extends our geographic reach to the Midwest area and our client reach to end-users, such as multinational corporations, universities, school districts and other large organizations that have significant ongoing cabling needs.
 
 
Tropical Communications, Inc.  In August 2011, we acquired Tropical Communications, Inc., a Florida corporation (“Tropical”), a Miami-based provider of structured cabling and DAS systems for commercial and governmental entities in the Southeast.
 
 
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Rives-Monteiro Engineering LLC and Rives-Monteiro Leasing, LLC.  In December 2011, we acquired a 49% stake in Rives-Monteiro Engineering, LLC, an Alabama limited liability company (“RM Engineering”), a certified Women Business Enterprise (WBE) cable firm based in Tuscaloosa, Alabama that performs engineering services in the Southeastern United States and internationally, and 100% of Rives-Monteiro Leasing, LLC, an Alabama limited liability company (“RM Leasing”, and together with RM Engineering, “Rives-Monteiro”), an equipment provider for cable-engineering services firms.  We have an option to purchase the remaining 51% of RM Engineering for a nominal sum at any time.  RM Engineering operates from its headquarters in Tuscaloosa, Alabama and provides services to customers located in the United States and Latin America.
 
 
Environmental Remediation and Financial Services, LLC.  In December 2012, our ADEX subsidiary acquired Environmental Remediation and Financial Services, LLC, a New Jersey limited liability company (“ERFS”), an environmental remediation and disaster recovery company.  The acquisition of this company augmented ADEX’s disaster recovery service offerings.

We have also entered into definitive agreements for the following acquisitions:

 
Telco.  In November 2012, we executed a definitive agreement to acquire the Telco Professional Services and Handset Testing business division (“Telco”) of Tekmark Global Solutions, LLC, a New Jersey limited liability company.  We plan to integrate this professional services and telecommunications staffing business into our ADEX subsidiary in order to expand our project staffing business and our access to skilled labor.
 
 
IPC.  In November 2012, we executed a definitive agreement to acquire Integration Partners-NY Corporation, a New York corporation (“IPC”), a New York-based cloud and managed services business, with professional services and applications capabilities.  IPC serves both corporate enterprises and telecommunications service providers.  We believe the acquisition of IPC will support our cloud and managed services aspect of our business, as well as improve our systems integration and applications capabilities.
 
In connection with the acquisitions of our subsidiaries, we entered into purchase agreements pursuant to which we agreed to certain on-going financial and other obligations.  The following is a summary of the material terms of the purchase agreements for our recent and pending acquisitions.

ADEX Corporation.  On September 17, 2012, we entered into an Equity Purchase Agreement (the “ADEX Agreement”) with the shareholders of ADEX and acquired all the outstanding capital stock of ADEX and ADEXCOMM Corporation, a New York corporation (“ADEXCOMM”), and all outstanding membership interests of ADEX Puerto Rico LLC, a Puerto Rican limited liability company (“ADEX Puerto Rico,” and together with ADEX and ADEXCOMM, the “ADEX Entities”).  Under the terms of the ADEX Agreement, we acquired all of the outstanding equity interests of the ADEX Entities in exchange for the cash payment at closing of $12,819,594, less the amount of debt of the ADEX Entities repaid by us at the closing (approximately $1,241,000).  We also issued promissory notes to pay the sellers the aggregate amount of $1,046,000 (the “ADEX Note”), which notes have since been paid in full.

As additional consideration, we agreed to pay the sellers an amount of cash equal to the product of 0.75 (the “Multiplier”) multiplied by the adjusted EBITDA of the ADEX Entities for the 12-month period beginning on October 1, 2012 (the “Forward EBITDA”), provided that if the Forward EBITDA is less than $2,731,243, the Multiplier shall be adjusted to 0.50 and if the Forward EBITDA is greater than $3,431,243, the Multiplier shall be adjusted to 1.0.  We also agreed to pay the sellers an amount of cash equal to the amount, if any, by which the Forward EBITDA is greater than $3,081,243.  In connection with the obligation to make these payments, we issued to the sellers 2,000 shares of our Series G Preferred Stock, and provided that those shares are redeemable in the event we default on our obligation to make such payments.  The shares of Series G Preferred will be automatically cancelled if we make the required payments in cash.  

We also agreed to pay the sellers an amount in cash equal to the net working capital of the ADEX Entities as of the closing date.  In connection with the obligation to make these payments, we issued to the sellers an aggregate of 3,500 shares of our Series G Preferred Stock, and provided that those shares are redeemable in the event we default on our obligation to make such payment.  As of March 28, 2013, 1,500 shares of Series G Preferred Stock have been released to us from escrow and the 2,000 remaining shares of Series G Preferred will be automatically cancelled if we make the remaining required payments.  

The ADEX Agreement contains representations, warranties, covenants and on-going indemnification obligations.  These covenants include an obligation during the year following the closing to continue to operate the ongoing business of the ADEX Entities in the same manner as previously conducted, and to provide certain of the sellers with substantial control over the business operations of the ADEX Entities.
 
 
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T N S, Inc.  On September 17, 2012, we entered into a Stock Purchase Agreement (the “T N S Agreement”) with the stockholders of T N S pursuant to which we acquired all the outstanding capital stock of T N S for the following consideration paid or issued by us at the closing: (i) cash in the amount of $700,000, (ii) 4,150 shares of our Series F Preferred Stock and (iii) 40,000 shares of our common stock.  In the T N S Agreement, we granted the sellers the right to put to us the shares of common stock issued at the closing for $12.50 per share, beginning 18 months after the closing and continuing for 60 days thereafter.  In the event the adjusted EBITDA of T N S for the 12 month period beginning October 1, 2012 is greater or less than $1,250,000, we also agreed to issue, or cancel, as appropriate, shares of Series F Preferred Stock based on an agreed-upon formula.

In addition, in the T N S Agreement, we agreed that, upon completion of a public offering of our securities, we will issue to the sellers an aggregate number of shares of common stock equal to (i) $200,000 divided by (ii) the offering price per share of our common stock in such public offering.  Finally, as additional consideration, we agreed to pay the sellers an amount equal to 20% of T N S’s adjusted EBITDA in excess of $1,275,000 for each of the three 12-month periods immediately following the closing date.  During such 36-month period, we agreed to operate T N S in the ordinary course with the commercially-reasonable objective of maximizing the amount payable to the sellers with respect to such three 12-month periods.

Tropical Communications, Inc.  On August 15, 2011, we entered into a Stock Purchase Agreement (the “Tropical Agreement”) with the sole shareholder of Tropical pursuant to which we acquired all of the issued and outstanding stock of Tropical for the following consideration: (i) 8,000 shares of common stock, (ii) the assumption of indebtedness in the aggregate amount of $334,369, (iii) an amount equal to 50% of the net income of Tropical Communications during the 18-month period following closing, of which there was none, and (iv) warrants to purchase up to 4,000 additional shares of common stock at a price equal to the lower of a 25% discount to the market price of the common stock on the date of exercise or $37.50 per share, for each $500,000 of EBITDA earned by Tropical during the 24-month period following closing.

Rives-Monteiro Engineering LLC and Rives-Monteiro Leasing, LLC.  On November 15, 2011, we entered into, and on December 14, 2011 we amended, a Stock Purchase Agreement (the “Rives-Monteiro Agreement”) with the two members of RM Engineering and RM Leasing pursuant to which we acquired 49% of the membership interests of RM Engineering, were granted the right to purchase the remaining 51% of RM Engineering for $1.00 and acquired all of the membership interests of RM Leasing for the following consideration: (i) a cash payment in the amount of $300,000, of which $100,000 was paid on December 29, 2011, the date of consummation of the acquisitions, $100,000 was payable on or before March 29, 2012, and $100,000 was payable on or before June 29, 2012, (ii) 60,000 shares of common stock, (ii) the assumption of indebtedness in the aggregate amount of $211,455, (iii) an amount equal to 50% of the net income of RM Engineering during the 18-month period following date of acquisition of RM Engineering, and (iv) warrants to purchase up to 4,000 additional shares of common stock at a price equal to the lower of a 25% discount to the market price of the common stock on the date of exercise or $37.50 per share, for each $500,000 of EBITDA earned by RM Engineering during the 24-month period following the date of acquisition of RM Engineering.  The cash payments in the aggregate amount of $200,000 were not paid when due in March and June 2012, and the parties expect that such payments will be made within 90 days of the date of this report.

The Rives-Monteiro Agreement contains representations, warranties, covenants and on-going indemnification obligations.  These covenants include an obligation during the year following the closing to continue to operate the ongoing business of RM Engineering in the same manner as previously conducted.

Environmental Remediation.  On November 30, 2012, ADEX entered into an Equity Purchase Agreement (the “Environmental Remediation Agreement”) with ERFS and the sole stockholder of ERFS pursuant to which ADEX acquired all the outstanding equity interests of ERFS for the following consideration paid or issued by us at the closing: (i) a number of shares of our Series I Preferred Stock equal to the quotient obtained by dividing (a) (1) the product of 4.0 and the amount of ERFS’s EBITDA (as defined) for the 12-month period ended November 30, 2012, less (2) the amount of ERFS’s outstanding indebtedness for borrowed money and certain other indebtedness on the date of the closing of the acquisition and (b) the offering price per share of our common stock in our next public offering.  In the Environmental Remediation Agreement, we granted the seller the right to put to us up to $750,000 stated amount of the Series I Preferred Shares (less the amount of pre-closing receivables collected and paid to the seller) on and after March 31, 2013.  

In addition, in the Environmental Remediation Agreement, as additional consideration, we agreed to pay the seller an amount, payable in cash or common stock, at our election, equal to 1.5 times ERFS’s EBITDA in the 12-month period ending December 31, 2013, provided the EBITDA for such period exceeds the amount of ERFS EBITDA for the 12-month period ended November 30, 2012 by $10,000 or more.  In addition, we agreed to cause  Environmental Remediation to pay to the seller on a bi-weekly basis an amount of cash equal to the amount of any receivables related to pre-closing activities of ERFS that are collected after the date of the acquisition, up to a maximum of $750,000.

Telco.  On November 19, 2012, we entered into an Asset Purchase Agreement (the “Tekmark Agreement”) to acquire all the property, assets and business of Telco from Tekmark Global Solutions LLC.  Under the terms of the Tekmark Agreement, at the closing of the acquisition, we will pay the seller an aggregate amount in cash equal to the difference between (i) the product of 5.0 multiplied by the Estimated Closing EBITDA (as defined) of Telco for the 12-month period ending on the last day of the month prior to the closing date (the “Estimated Closing TTM EBITDA”), less (ii) $2,600,000.  In addition, we will issue to the seller a number of shares of common stock equal to the product of (i) the Estimated Closing TTM EBITDA, and (ii) the price of the common stock sold in our next public offering, rounded to the nearest whole share. We will also pay the seller additional cash compensation in an amount equal to the EBITDA (as defined) of Telco for the 12-month period beginning on the first day of the first calendar month commencing after the closing date (the “Initial Earnout Period”).
 
 
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Following the closing, as additional consideration, we will make supplemental payments to the seller in cash for (i) the 12-month period beginning on the first day of the thirteenth calendar month commencing after the closing date (the “First Supplemental Earnout Period”) and (ii) the 12-month period beginning on the first day of the twenty-fifth calendar month commencing after the closing date (the “Second Supplemental Earnout Period”). The payment made for the First Supplemental Earnout Period will be an amount equal to the product of 2.0 multiplied by the positive difference, if any, between (A) the EBITDA of Telco for the First Supplemental Earnout Period, minus (B) the Closing TTM EBITDA (as defined). The payment made for the Second Supplemental Earnout Period will be an amount equal to the product of 2.0 multiplied by the positive difference, if any, between (Y) the EBITDA of Telco for the Second Supplemental Earnout Period, minus (Z) the Closing TTM EBITDA.

The Tekmark Agreement contains customary representations, warranties, covenants and indemnification provisions. The closing of the acquisition remains subject to closing conditions, including the accuracy of representations and warranties of the parties in the Tekmark Agreement and consummation of an equity financing, to secure sufficient funding for the transaction.  The Tekmark Agreement may be terminated at any time prior to closing (i) by mutual consent of the parties, (ii) by either party if the closing has not occurred by May 15, 2013, (iii) by either party if the other party has breached any of its representations, warranties or covenants or (iv) by either party if a court or governmental authority has issued a final order or ruling prohibiting the transaction.

IPC.  On November 20, 2012, we entered into a Stock Purchase Agreement (the “IPC Agreement”) to acquire all the outstanding capital stock of IPC.  Under the terms of the IPC Agreement, at the closing of the acquisition, we will pay the sellers (a) a cash payment in an amount equal to (i) the product of 5.2 multiplied by the TTM EBITDA (as defined), (ii) less Estimated Closing Debt (as defined), (iii) less Estimated Company Unpaid Transaction Expenses (as defined), (iv) plus any Estimated Working Capital Surplus (as defined) or less any Estimated Working Capital Deficiency (as defined), less the Escrow Amount (the “Initial Cash Payment”) and (b) a stock payment consisting of a number of shares of common stock equal to the quotient obtained by dividing (A) (i) the product of 0.2 multiplied by the TTM EBITDA, (ii) less Estimated Closing Debt, (iii) less Estimated Company Unpaid Transaction Expenses, (iv) plus any Estimated Working Capital Surplus or less any Estimated Working Capital Deficiency, by (B) the price of a share of common stock in our next public offering.  Each seller may elect to receive a portion of such seller’s pro rata share of the Initial Cash Payment, up to an amount equal to such Seller’s pro rata share of the TTM EBITDA, in shares of common stock in lieu of cash (the “Elected Amount”) provided that such seller (i) provides proper notification of such election and (ii) the number of shares to be so issued shall be determined by dividing such seller’s Elected Amount by the price of a share of common stock in our next public offering.

As additional consideration, following the closing, we will make an additional cash payment in an amount equal to the aggregate amount of (i) the product of 0.6 multiplied by the EBITDA of IPC for the 12-month period beginning on the first day of the first calendar month commencing after the closing date (the “Forward EBITDA”), plus (ii) in the event that the Forward EBITDA exceeds the TTM EBITDA by 5.0% or more, an amount equal to 2.0 multiplied by this difference.

The IPC Agreement contains customary representations, warranties, covenants and indemnification provisions. The closing remains subject to closing conditions, including the accuracy of representations and warranties of the parties in the IPC Agreement and completion of a public offering of our common stock.  The IPC Agreement may be terminated at any time prior to closing (i) by mutual consent of the parties, (ii) by either party if the closing has not occurred by May 15, 2013, (iii) by either party if the other party has breached any of its representations, warranties or covenants or (iv) by either party if a court or governmental authority has issued a final order or ruling prohibiting the transaction.

Our Industry

Global Internet traffic is expected to continue to grow rapidly, driven by factors such as the increased use of smart phones, tablets and other internet devices, the proliferation of social networking and the increased adoption of cloud-based services.  Corporate enterprises are increasingly adopting cloud-based services, which enable them and other end users to rapidly deploy applications without building out their own expensive infrastructure and to minimize the growth in their own IT departments.

Global Internet traffic is expected to quadruple from 2011 to 2016 according to a 2012 white paper prepared by Cisco Systems, Inc. (Cisco).  Global data traffic (including as a result of the use of smartphones, tables, laptops and other mobile telecommunications devices) is expected to increase 18 times from 2011 to 2016, according to the same report.  Subscriptions to either free or paid cloud services are expected to continue to increase from 500 million consumers worldwide in 2012, to an estimated 625 million in 2013, and then double over the course of four years to reach 1.3 billion by 2017, according to the IHS iSuppli Mobile & Wireless Communications service report.
 
 
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Source: IHS iSuppli Research, October 2012

Corporate enterprises are increasingly adopting cloud-based services to integrate applications, decrease capital and operational expense and create business agility by taking advantage of accelerated time to market dynamics.  Demand for cloud-based services creates demand for both providing solutions to end-user corporate enterprises as well as augmenting the offerings of telecommunications service providers.

The rapid increase in data traffic, usage of wireless networks and evolution of services and technology are also driving telecommunications providers to undertake a number of initiatives to increase coverage, capacity and performance of their existing networks, including adding and upgrading cell sites nationwide.

To remain competitive and meet the rapidly-growing demand for state-of-the-art mobile data services, telecommunications and cable companies rely on outsourcing to provide a wide range of network and infrastructure services, as well as project staffing services, to help build out and maintain their networks.  OEMs supplying equipment to those telecommunications and cable service providers also frequently rely on outsourced solutions for project management and network deployment.  Demand for these services is expected to grow rapidly.  According to the Telecommunications Industry Association 2012 ICT Market Review, the wireless telecommunications and network infrastructure outsourcing market has grown 9.5% per year since 2004 and is expected to continue to grow at a 5.9% rate through 2014, becoming a $21.6 billion market in 2014.

Technological convergence of voice, video and data, as well as competitive pressures, are driving consolidation in the telecommunications industry and cable broadband marketplace. Because of the immense integration challenges, merging entities rely in part on specialty solutions providers to efficiently integrate different technologies and networks into a single network.

In building out and managing telecommunications networks, service providers and enterprise customers face many challenges, including difficulty locating, recruiting, hiring and retaining skilled labor, significant capital investment requirements and competitive pressures on operating margins.  In response to these ongoing challenges, telecommunications providers and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring.  Outsourcing professional services also allows telecommunications providers and enterprise customers to focus on those competencies they consider core to their business success.

Our Solution

We seek to become the single-source provider of choice of end-to-end outsourced cloud and managed services, network infrastructure and project staffing solutions, to corporate enterprises and telecommunications and broadband service providers.  We believe that our strengths described below will enable us to continue to compete effectively and to take advantage of anticipated growth in our target markets.

Our Competitive Strengths

Single-Source Provider of End-to-End Network Infrastructure, Cloud and Managed Services and Project Staffing Needs, Applications and Infrastructure to Enterprise and Service Providers.  We believe our ability to address a wide range of end-to-end network solutions, infrastructure and project staffing needs for our clients is a key competitive advantage.  Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, installation and integration services) allows customers to turn to a single source for these specific specialty services, as well as to entrust us with the execution of entire turn-key solutions.
 
 
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Established Customer Relationships With Leading Infrastructure Providers.  We have established relationships with many leading wireless and wireline telecommunications providers, cable broadband MSOs, OEMs and others. We have over 30 master service agreements with service providers and OEMs. Our current customers include Ericsson Inc., Verizon Communications Inc., Alcatel-Lucent USA Inc., Century Link, Inc., AT&T Inc. and Hotwire Communications. Our relationships with our customers and existing master service agreements position us to continue to capture existing and emerging opportunities, both domestically and internationally.  We believe the barriers are extremely high for new entrants to obtain master service agreements with service providers and OEMs unless there are established relationships and a proven ability to execute.

Proven Ability to Recruit, Manage and Retain High Quality Telecommunications Personnel.  Our ability to recruit, manage and retain skilled labor is a critical advantage in an industry in which a shortage of skilled labor is often a key limitation for our customers and competitors alike.  We own and operate an actively-maintained database of more than 70,000 telecom personnel.  We also employ highly-skilled recruiters and utilize an electronic hiring process that we believe expedites deployment of personnel and reduces costs.  Our staffing capabilities allow us to efficiently locate and engage skilled personnel for projects, helping ensure that we do not miss out on opportunities due to a lack of skilled labor.  We believe this access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.

Strong Senior Management Team with Proven Ability to Execute.  Our highly-experienced management team has deep industry knowledge and a strong track record of successful execution in major corporations, as well as startup ventures.  Our senior management team brings an average of over 25 years of individual experience across a broad range of disciplines.  We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.

Scalable and Capital Efficient Business Model.  We typically hire workers to staff projects on a project-by-project basis and we believe this business model enables us to staff our business efficiently to meet changes in demand.  Our operating expenses, other than staffing, are primarily fixed; we are generally able to deploy personnel to infrastructure projects in the United States and beyond with incremental increases in operating costs.

Our Growth Strategy

Under the leadership of our senior management team we intend to build out sales, marketing and operations groups to support our rapid growth while focusing on increasing operating margins.  While organic growth will be a main focus in driving our business forward, acquisitions will play a strategic role in augmenting existing product and service lines and cross selling opportunities.  We are pursuing several strategies, including:

 
·  
Grow Revenues and Market Share through Selective Acquisitions.  We plan to continue to acquire private companies that enhance our earnings and offer complementary services or expand our geographic reach.  We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths, and capture and retain more work in-house as a prime contractor for our clients, thereby contributing to our profitability.  We also believe that increased scale will enable us to bid and take on larger contracts.  We believe there are many potential acquisition candidates in the high-growth cloud computing space, the fragmented professional services markets, and in the applications and infrastructure arena.

 
·  
Deepen Our Relationships With Our Existing Customer Base.  Our customers include many leading wireless and wireline telecommunications providers, cable broadband MSOs, OEMs and enterprise customers.  As we have expanded the breadth of our service offerings through both organic growth and selective acquisitions, we believe we have opportunities to expand revenues with our existing clients by marketing additional service offerings to them, as well as by extending services to existing customers in new geographies.

 
·  
Expand Our Relationships with New Service Providers. We plan to expand new relationships with smaller cable broadband providers, competitive local exchange carriers (CLECs), integrated communication providers (IC’s), competitive access providers (CAPs), network access point providers (NAPs) and integrated communications providers (ICPs).  We believe that the business model for the expansion of these relationships, leveraging our core strength and array of service solutions, will support our business model for organic growth.

 
·  
Increase Operating Margins by Leveraging Operating Efficiencies.  We believe that by centralizing administrative functions, consolidating insurance coverages and eliminating redundancies across our newly-acquired businesses, we will be positioned to offer more integrated end-to-end solutions and improve operating margins.
 
 
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Our Services

We provide cloud- and managed-service-based platforms, professional services, applications and infrastructure to both the telecommunications industry and corporate enterprises.  Our cloud-based and managed services and our engineering, design, construction, installation, maintenance and project staffing services support the build-out, maintenance, upgrade and operation of some of the most advanced fiber optic, Ethernet, copper, wireless and satellite networks.  Our breadth of services enables our customers to selectively augment existing services or to outsource entire projects or operational functions. We divide our service offerings into the following categories of services:

 
Cloud and Managed Services.  We provide integrated cloud-based solutions that allow organizations around the globe to integrate their applications on various services into a web-hosted environment.  We combine engineering expertise with service and support to maintain and support telecommunications networks.  We provide hardware solutions and applications, as well as professional services, that work as a seamless extension of a telecommunications service provider or enterprise end user.
 
 
Applications and Infrastructure.  We provide an array of applications and services, including unified communications, voice recognition and call centers, as well as structured cabling, field installations and other infrastructure solutions.  Our design, engineering, installation and maintenance of various types of local and wide-area networks, DAS systems, and other broadband installation and maintenance services augment ILECs, telecommunications OEMs, cable broadband MSOs and large end-users.  Our services and applications support the deployment of new networks and technologies, as well as expand and maintain existing networks.  We also sell hardware and applications for the leading OEMs that support voice, data and optical networks.
 
 
Applications.  We apply our expertise in networking, converged communications, security, data center solutions and other technologies utilizing our skills in consulting, integration and managed services to create customized solutions for our enterprise customers.  We provide applications for managed data, converged services (single and multiple site); voice recognition, session initiation protocol (SIP trunking-Voice Over IP, streaming media, UC) collocation services and others.
 
 
Wireless and Wireline Installation, Commission and Integration.  We provide a full-range of solutions to OEMs, wireless carriers and enterprise customers throughout the United States, including structured cabling, wiring and field installation of various types of local and wide-area networks and DAS systems, and outside plant work.  Our technicians construct, install, maintain and integrate wireless communications and data networks for some of the largest cellular broadband and digital providers in the United States.  Our projects include services to Verizon Communications and Ericsson in connection with their 4G/LTE network deployments throughout the United States.
 
 
Turn-Key Communications Services.  Our telecom and broadband services group addresses the growing demand for broadband-based unified communications and structured cabling.  Our services include switch conditioning, switch re-grooming, cable splicing and grounding audits.  Our premise wiring services include design, engineering, installation, integration, maintenance and repair of telecommunications networks for voice, video and data inside various corporate enterprises, as well as state and local government properties.  Additionally, we provide maintenance and installation of electric utility grids and water and sewer utilities.  We provide outside plant telecommunications services primarily under hourly and per-unit-basis contracts to local telephone companies.  We also provide these services to U.S. corporations, long distance telephone companies, electric utility companies, local municipalities and cable broadband MSOs.
 
 
Disaster Recovery.  Our disaster recovery services provide emergency network restoration services and environmental remediation services to leading telecommunications carriers throughout the United States, including projects for Hurricane Sandy relief, Hurricane Katrina relief, Alabama Tornado relief and Southern California flood assistance.  Customers include AT&T, Verizon Wireless and Century Link/Quest.
 
 
Professional Services.  As a result of our acquisition of ADEX, we have a proprietary international recruiting database of more than 70,000 telecom professionals, the majority of which are well-qualified engineering professionals and experienced project managers.  We believe our skilled recruiters, combined with an entirely electronic staffing process, reduce our overall expenses for any project because of our efficient recruiting and deployment techniques.  On a weekly basis, we deploy hundreds of telecommunications professionals in support of network infrastructure deployments worldwide.
 
Customers

Our customers include many leading corporate enterprises, wireless and wireline telecommunications providers, cable broadband MSOs and OEMs and small independent phone companies.  Our enterprise solutions are provided to small businesses and Fortune 500 companies. Our current service provider and OEM customers include leading telecommunications companies, such as Ericsson, Inc., Verizon Communications, Sprint Nextel Corporation and AT&T.

Our top two customers, Verizon Communications and Danella Construction, accounted for approximately 73% of our total revenues in the year ended December 31, 2011.  Our top four customers, Nexlink, Ericsson, Inc., Verizon Communications and Ericsson Caribbean, accounted for approximately 59% of our total revenues in the year ended December 31, 2012.  Ericsson, as an OEM provider for seven different carrier projects, represented approximately 33% of our total revenues in the year ended December 31, 2012.
 
 
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A substantial portion of our revenue is derived from work performed under multi-year master service agreements and multi-year service contracts.  We have entered into master service agreements (MSAs) with numerous service providers and OEMs, and generally have multiple agreements with each of our customers.  MSAs are awarded primarily through a competitive bidding process based on the depth of our service offerings, experience and capacity. MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks, but do not require our customers to purchase a minimum amount of services.  To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers.  Most of our MSAs may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether we are then in default.  In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any prior notice.  Our cloud-managed service offerings have multi-year agreements and provide the customers with service level commitments. This is one of the fastest growing portions of our business.

Suppliers and Vendors

We have agreements with major telecommunications vendors such as Ericsson. For a majority of the contract services we perform, our customers supply the necessary materials.  We expect to continue to further develop these relationships and to broaden our scope of work with each of our partners.  In many cases, our relationships with our partners have extended for over a decade, which we attribute to our commitment to excellence.  It is our objective to selectively expand our partnerships moving forward in order to expand our service offerings.

Competition

The business of providing infrastructure and managed services to telecommunications companies and enterprise clients is highly fragmented and the business is characterized by a large number of participants, including several large companies, as well as a significant number of small, privately-held, local competitors.

Our current and potential larger competitors include Arrow Electronics, Inc., Black Box Corporation Dimension Data, Dycom Industries, Inc., Goodman Networks, Inc., MasTec, Inc., TeleTech Holdings, Inc., Unisys Corporation, Unitek Global Services, Inc., Tech Mahindra and Volt Information Sciences, Inc.  A significant portion of our services revenue is currently derived from MSAs and price is often an important factor in awarding such agreements.  Accordingly, our competitors may underbid us if they elect to price their services aggressively to procure such business.  Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position.  The principal competitive factors for our services include geographic presence, breadth of service offerings, worker and general public safety, price, quality of service and industry reputation.  We believe we compete favorably with our competitors on the basis of these factors.

Safety and Risk Management

We require our employees to participate in internal training and service programs from time to time relevant to their employment and to complete any training programs required by law.  We review accidents and claims from our operations, examine trends and implement changes in procedures to address safety issues.  Claims arising in our business generally include workers’ compensation claims, various general liability and damage claims, and claims related to vehicle accidents, including personal injury and property damage.  We insure against the risk of loss arising from our operations up to certain deductible limits in substantially all of the states in which we operate.  In addition, we retain risk of loss, up to certain limits, under our employee group health plan.  We evaluate our insurance requirements on an ongoing basis to help ensure we maintain adequate levels of coverage.

We carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments.  The estimated costs of claims are accrued as liabilities, and include estimates for claims incurred but not reported.  Due to fluctuations in our loss experience from year to year, insurance accruals have varied and can affect the consistency of our operating margins.  If we experience insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.

Employees

As of March 28, 2013, we had 449 full-time employees and six part-time employees, of whom 52 were in administration and corporate management, ten were accounting personnel and 390 were technical and project managerial personnel.

In general, the number of our employees varies according to the level of our work in progress.  We maintain a core of technical and managerial personnel to supervise all projects and add employees as needed to complete specific projects.  Because we also provide project staffing, we are well-positioned to respond to changes in our staffing needs.
 
 
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Environmental Matters

A portion of the work we perform is associated with the underground networks of our customers.  As a result, we are potentially subject to material liabilities related to encountering underground objects that may cause the release of hazardous materials or substances.  We are subject to federal, state and local environmental laws and regulations, including those regarding the removal and remediation of hazardous substances and waste.  These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities.  These costs could be significant and could adversely affect our results of operations and cash flows.

Regulation

Our operations are subject to various federal, state, local and international laws and regulations, including licensing, permitting and inspection requirements applicable to electricians and engineers; building codes; permitting and inspection requirements applicable to construction projects; regulations relating to worker safety and environmental protection; telecommunication regulations affecting our fiber optic licensing business; labor and employment laws; and laws governing advertising.

We believe that we have all the licenses required to conduct our operations.  Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses.

ITEM 1A.        RISK FACTORS
 
Investing in our securities involves a high degree of risk.  You should carefully consider the following risk factors and all other information contained in this report before purchasing our securities.  If any of the following risks occur, our business, financial condition, results of operations and prospects could be materially and adversely affected.  In that case, the market price of our common stock could decline, and you could lose some or all of your investment.

Risks Related to Our Business

A failure to successfully execute our strategy of acquiring other businesses to grow our company could adversely affect our business, financial condition, results of operations and prospects.

We intend to continue pursuing growth through the acquisition of companies or assets to expand our project skill-sets and capabilities, enlarge our geographic markets, add experienced management and increase critical mass to enable us to bid on larger contracts.  However, we may be unable to find suitable acquisition candidates or to complete acquisitions on favorable terms, if at all.  Moreover, any completed acquisition may not result in the intended benefits and involves a number of risks, including:

 
We may have difficulty integrating the acquired companies;
 
 
Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
 
 
We may not realize the anticipated cost savings or other financial benefits we anticipated;
 
 
We may have difficulty applying our expertise in one market to another market;
 
 
We may have difficulty retaining or hiring key personnel, customers and suppliers to maintain expanded operations;
 
 
Our internal resources may not be adequate to support our operations as we expand, particularly if we are awarded a significant number of contracts in a short time period;
 
 
We may have difficulty retaining and obtaining required regulatory approvals, licenses and permits;
 
 
We may not be able to obtain additional equity or debt financing on terms acceptable to us or at all, and any such financing could result in dilution to our stockholders, impact our ability to service our debt within the scheduled repayment terms and include covenants or other restrictions that would impede our ability to manage our operations;
 
 
We may have failed to, or were unable to, discover liabilities of the acquired companies during the course of performing our due diligence; and
 
 
We may be required to record additional goodwill as a result of an acquisition, which will reduce our tangible net worth.
 
Any of these risks could prevent us from executing our acquisition growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
 
 
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We may be unable to successfully integrate our recent and future acquisitions, which could adversely affect our business, financial condition, results of operations and prospects.

We recently acquired a number of companies, including ADEX and T N S in September 2012 and ERFS in December 2012, and have entered into definitive agreements for the acquisition of two additional companies.  The operation and management of recent acquisitions, or any of our future acquisitions, may adversely affect our existing income and operations or we may not be able to effectively manage any growth resulting from these transactions.  Before we acquired them, these companies operated independently of one another.  Until we establish centralized financial, management information and other administrative systems, we will rely on the separate systems of these companies, including their financial reporting systems.

Our success will depend, in part, on the extent to which we are able to merge these functions, eliminate the unnecessary duplication of other functions and otherwise integrate these companies (and any additional businesses with which we may combine in the future) into a cohesive, efficient enterprise.  This integration process may entail significant costs and delays could occur.  Our failure to integrate the operations of these companies successfully could adversely affect our business, financial condition, results of operations and prospects.  To the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might adversely affect our business, financial condition, results of operations and prospects, as well as our credit and bonding capacity.

We derive a significant portion of our revenue from master service agreements that may be cancelled by customers on short notice, or which we may be unable to renew on favorable terms or at all.

During the years ended December 31, 2012 and 2011, we derived approximately 60% and 59%, respectively, of our revenues from master service agreements and long-term contracts, none of which require our customers to purchase a minimum amount of services.  The majority of these contracts may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether or not we are in default.  In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any notice.

These agreements typically do not require our customers to assign a specific amount of work to us until a purchase order or statement of work is signed.  Consequently, projected expenditures by customers are not assured until a definitive purchase order or statement of work is placed with us and the work is completed.  Furthermore, our customers generally require competitive bidding of these contracts.  As a result, we could be underbid by our competitors or required to lower the price charged under a contract being rebid.  The loss of work obtained through master service agreements and long-term contracts or the reduced profitability of such work could adversely affect our business or results of operations.

If we do not accurately estimate the overall costs when we bid on a contract that is awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.

A significant portion of our revenues from our engineering and professional services offerings are derived from fixed unit price contracts that require us to perform the contract for a fixed unit price irrespective of our actual costs.  We bid for these contracts based on our estimates of overall costs, but cost overruns may cause us to incur losses.  The costs incurred and any net profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:

 
onsite conditions that differ from those assumed in the original bid;
 
 
delays in project starts or completion, including as a result of weather conditions;
 
 
fluctuations in the cost of materials to perform under a contract;
 
 
contract modifications creating unanticipated costs not covered by change orders;
 
 
changes in availability, proximity and costs of construction materials, as well as fuel and lubricants for our equipment;
 
 
availability and skill level of workers in the geographic location of a project;
 
 
our suppliers’ or subcontractors’ failure to perform due to various reasons, including bankruptcy;
 
 
fraud or theft committed by our employees;
 
 
mechanical problems with our machinery or equipment;
 
 
citations or fines issued by any governmental authority;
 
 
difficulties in obtaining required governmental permits or approvals or performance bonds;
 
 
changes in applicable laws and regulations; and
 
 
claims or demands from third parties alleging damages arising from our work or from the project of which our work is a part.
 
 
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These factors may cause actual reduced profitability or losses on projects, which could adversely affect our business, financial condition, results of operations and prospects.

Our contracts may require us to perform extra or change order work, which can result in disputes and adversely affect our business, financial condition, results of operations and prospects.

Our contracts generally require us to perform extra or change order work as directed by the customer, even if the customer has not agreed in advance on the scope or price of the extra work to be performed.  This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work.  Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.

We generally recognize revenues when services are invoiced.  To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could adversely affect our reported working capital and results of operations.  In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.

We derive a significant portion of our revenue from a few customers and the loss of one of these customers, or a reduction in their demand for our services, could adversely affect our business, financial condition, results of operations and prospects.

Our customer base is highly concentrated.  Due to the size and nature of our construction contracts, one or a few customers have represented a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years.  Verizon Communications accounted for approximately 7% of our total revenues in the year ended December 31, 2012 and 56% of our total revenue in the year ended December 31, 2011.  Our top four customers, Nexlink, Ericsson, Inc., Verizon Communications and Ericsson Caribbean, accounted for approximately 59% of our total revenues in the year ended December 31, 2012.  Our top two customers, Verizon Communications and Danella Construction, accounted for approximately 73% of our total revenues in the year ended December 31, 2011.  Revenues under our contracts with significant customers may continue to vary from period to period depending on the timing or volume of work that those customers order or perform with their in-house service organizations.  A limited number of customers may continue to comprise a substantial portion of our revenue for the foreseeable future.  Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could adversely affect our business, financial condition, results of operations and prospects.  We could lose business from a significant customer for a variety of reasons, including:

 
the consolidation, merger or acquisition of an existing customer, resulting in a change in procurement strategies employed by the surviving entity that could reduce the amount of work we receive;
 
 
our performance on individual contracts or relationships with one or more significant customers are impaired due to another reason, which may cause us to lose future business with such customers and, as a result, our ability to generate income would be adversely impacted;
 
 
the strength of our professional reputation; and
 
 
key customers could slow or stop spending on initiatives related to projects we are performing for them due to increased difficulty in the credit markets as a result of the recent economic crisis or other reasons.
 
Since many of our customer contracts allow our customers to terminate the contract without cause, our customers may terminate their contracts with us at will, which could impair our business, financial condition, results of operations and prospects.

Our business is labor intensive and if we are unable to attract and retain key personnel and skilled labor, or if we encounter labor difficulties, our ability to bid for and successfully complete contracts may be negatively impacted.

Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and profitably complete our work.  Our future success depends on our ability to attract, hire and retain project managers, estimators, supervisors, foremen, equipment operators, engineers, linemen, laborers and other highly-skilled personnel.  Our ability to do so depends on a number of factors, such as general rates of employment, competitive demands for employees possessing the skills we need and the level of compensation required to hire and retain qualified employees.  We may also spend considerable resources training employees who may then be hired by our competitors, forcing us to spend additional funds to attract personnel to fill those positions.  Competition for employees is intense, and we could experience difficulty hiring and retaining the personnel necessary to support our business.  Our labor expenses may also increase as a result of a shortage in the supply of skilled personnel.  If we do not succeed in retaining our current employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and our future earnings may be negatively impacted.
 
 
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If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.

We depend on the continued efforts and abilities of our executive officers, as well as the senior management of our subsidiaries, to establish and maintain our customer relationships and identify strategic opportunities.  The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects.  Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors.  Although we have entered into employment agreements with certain of our executive officers and certain other key employees, we cannot guarantee that any of them or other key management personnel will remain employed by us for any length of time.

Because we maintain a workforce based upon current and anticipated workloads, we may incur significant costs in adjusting our workforce demands, including addressing understaffing of contracts, if we do not receive future contract awards or if these awards are delayed.

Our estimates of future performance depend, in part, upon whether and when we will receive certain new contract awards.  Our estimates may be unreliable and can change from time to time.  In the case of larger projects, where timing is often uncertain, it is particularly difficult to project whether and when we will receive a contract award.  The uncertainty of contract award timing can present difficulties in matching workforce size with contractual needs.  If an expected contract award is delayed or not received, we could incur significant costs resulting from retaining more staff than is necessary.  Similarly, if we underestimate the workforce necessary for a contract, we may not perform at the level expected by the customer and harm our reputation with the customer.  Each of these may negatively impact our business, financial condition, results of operations and prospects.

Timing of the award and performance of new contracts could adversely affect our business, financial condition, results of operations and prospects.

It is generally very difficult to predict whether and when new contracts will be offered for tender because these contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals.  Because of these factors, our results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.  Such delays, if they occur, could adversely affect our operating results for current and future periods until the affected contracts are completed.

Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.

Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance.  Our operating results have fluctuated significantly in the past, and could fluctuate in the future.  Factors that may contribute to fluctuations include:

 
changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries we serve;
 
 
our ability to effectively manage our working capital;
 
 
our ability to satisfy consumer demands in a timely and cost-effective manner;
 
 
pricing and availability of labor and materials;
 
 
our inability to adjust certain fixed costs and expenses for changes in demand;
 
 
shifts in geographic concentration of customers, supplies and labor pools; and
 
 
seasonal fluctuations in demand and our revenue.
 
Unanticipated delays due to adverse weather conditions, global climate change and difficult work sites and environments may slow completion of our contracts, impair our customer relationships and adversely affect our business, financial condition, results of operations and prospects.

Because some of our work is performed outdoors, our business is impacted by extended periods of inclement weather and is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur.  Generally, inclement weather is more likely to occur during the winter season, which falls during our second and third fiscal quarters.  Additionally, adverse weather conditions can result in project delays or cancellations, potentially causing us to incur additional unanticipated costs, reductions in revenues or the payment of liquidated damages.  In addition, some of our contracts require that we assume the risk that actual site conditions vary from those expected.  Significant periods of bad weather typically reduce profitability of affected contracts, both in the current period and during the future life of affected contracts, which can negatively affect our results of operations in current and future periods until the affected contracts are completed.
 
 
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Some of our projects involve challenging engineering, procurement and construction phases that may occur over extended time periods, sometimes up to several years.  We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but which may impact our ability to complete a project within the original delivery schedule.  In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay.  We may not be able to recover any of these costs.  Any such delays, cancellations, defects, errors or other failures to meet customer expectations could result in damage claims substantially in excess of revenue associated with a project.  These factors could also negatively impact our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.

Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could adversely affect our business, financial condition, results of operations and prospects.

Our operations are subject to laws and regulations relating to workplace safety and worker health that, among other things, regulate employee exposure to hazardous substances.  While immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, we may nonetheless unknowingly employ illegal immigrants.  Violations of laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims.  In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent.  Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied.  Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.

If we fail to maintain qualifications required by certain governmental entities, we could be prohibited from bidding on certain contracts.

If we do not maintain qualifications required by certain governmental entities, such as low voltage electrical licenses, we could be prohibited from bidding on certain governmental contracts.  A cancellation of an unfinished contract or our exclusion from the bidding process could cause our work crews to be idled for a significant period of time until other comparable work becomes available, which could adversely affect our business and results of operations.  The cancellation of significant contracts or our disqualification from bidding for new contracts could reduce our revenues and profits and adversely affect our business, financial condition, results of operations and prospects.

Fines, judgments and other consequences resulting from our failure to comply with regulations or adverse outcomes in litigation proceedings could adversely affect our business, financial condition, results of operations and prospects.

From time to time, we may be involved in lawsuits and regulatory actions, including class action lawsuits, that are brought or threatened against us in the ordinary course of business.  These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, violations of the Fair Labor Standards Act and state wage and hour laws, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief.  Any defects or errors, or failures to meet our customers’ expectations could result in large damage claims against us.  Claimants may seek large damage awards and, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings.  Any failure to properly estimate or manage cost, or delay in the completion of projects, could subject us to penalties.

The ultimate resolution of these matters through settlement, mediation or court judgment could have a material impact on our financial condition, results of operations and cash flows.  Regardless of the outcome of any litigation, these proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves.  When appropriate, we establish reserves for litigation and claims that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to developments.  If our reserves are inadequate or insurance coverage proves to be inadequate or unavailable, our business, financial condition, results of operations and prospects may suffer.

We employ and assign personnel in the workplaces of other businesses, which subjects us to a variety of possible claims that could adversely affect our business, financial condition, results of operations and prospects.

We employ and assign personnel in the workplaces of other businesses.  The risks of these activities include possible claims relating to:

 
discrimination and harassment;
 
 
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wrongful termination or denial of employment;
 
 
violations of employment rights related to employment screening or privacy issues;
 
 
classification of employees, including independent contractors;
 
 
employment of illegal aliens;
 
 
violations of wage and hour requirements;
 
 
retroactive entitlement to employee benefits; and
 
 
errors and omissions by our temporary employees.
 
Claims relating to any of the above could subject us to monetary fines or reputational damage, which could adversely affect our business, financial condition, results of operations and prospects.

If we are required to reclassify independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial condition, results of operations and prospects.

We use a significant number of independent contractors in our operations for whom we do not pay or withhold any federal, state or provincial employment tax.  There are a number of different tests used in determining whether an individual is an employee or an independent contractor and such tests generally take into account multiple factors.  There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent contractors.  Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties.  If we are required to pay employer taxes or pay backup withholding with respect to prior periods with respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business, financial condition, results of operations and prospects.

Increases in the cost of fuel could adversely affect our business, financial condition, results of operations and prospects.

The price of fuel needed to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns and environmental concerns.  Most of our contracts do not allow us to adjust our pricing.  Accordingly, any increase in fuel costs could adversely affect our business, financial condition, results of operations and prospects.

Our dependence on subcontractors and suppliers could increase our costs and impair our ability to complete contracts on a timely basis or at all.

We rely on third-party subcontractors to perform some of the work on many of our contracts.  We also rely on third-party suppliers to provide most of the materials needed to perform our obligations under those contracts.  We generally do not bid on contracts unless we have the necessary subcontractors and suppliers committed for the anticipated scope of the contract and at prices that we have included in our bid.  Therefore, to the extent that we cannot engage subcontractors or suppliers, our ability to bid for contracts may be impaired.  In addition, if a subcontractor or third-party supplier is unable to deliver its goods or services according to the negotiated terms for any reason, we may suffer delays and be required to purchase the services from another source at a higher price.  We sometimes pay our subcontractors and suppliers before our customers pay us for the related services.  If customers fail to pay us and we choose, or are required, to pay our subcontractors for work performed or pay our suppliers for goods received, we could suffer an adverse effect on our business, financial condition, results of operations and prospects.

Our insurance coverage may be inadequate to cover all significant risk exposures.

We will be exposed to liabilities that are unique to the services we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
 
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Our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.

Our workers are subject to hazards associated with providing construction and related services on construction sites.  For example, some of the work we perform is underground.  If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants that could result in a rupture and discharge of pollutants.  In such a case, we may be liable for fines and damages.  These operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage.  Even though we believe that the insurance coverage we maintain is in amounts and against the risks that we believe are consistent with industry practice, this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations.  To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our business, financial condition, results of operations and prospects could be adversely affected.

The Occupational Safety and Health Act of 1970, as amended (OSHA), establishes certain employer responsibilities, including the maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Health and Safety and Health Administration and various recordkeeping, disclosure and procedural requirements.  While we have invested, and will continue to invest, substantial resources in occupational health and safety programs, serious accidents or violations of OSHA rules may subject us to substantial penalties, civil litigation or criminal prosecution, which could adversely affect our business, financial condition, results of operations and prospects.

Defects in our specialty contracting services may give rise to claims against us, increase our expenses, or harm our reputation.

Our specialty contracting services are complex and our final work product may contain defects.  We have not historically accrued reserves for potential claims as they have been immaterial.  The costs associated with such claims, including any legal proceedings, could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Industry

Our industry is highly competitive, with a variety of larger companies with greater resources competing with us, and our failure to compete effectively could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance.

The contracts on which we bid are generally awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes based on other factors, such as shorter contract schedules or prior experience with the customer.  Within our markets, we compete with many national, regional, local and international service providers, including Dycom Industries, Inc., MasTec, Inc., Tech Mahindra, Unisys Corporation and Goodman Networks, Inc.  Price is often the principal factor in determining which service provider is selected by our customers, especially on smaller, less complex projects.  As a result, any organization with adequate financial resources and access to technical expertise may become a competitor.  Smaller competitors are sometimes able to win bids for these projects based on price alone because of their lower costs and financial return requirements.  Additionally, our competitors may develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position.  We also face competition from the in-house service organizations of our customers whose personnel perform some of the services that we provide.

Some of our competitors have already achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do.  A number of national companies in our industry are larger than we are and, if they so desire, could establish a presence in our markets and compete with us for contracts.  As a result of this competition, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer.  If we are unable to compete successfully in our markets, our business, financial condition, results of operations and prospects could be adversely affected.

Many of the industries we serve are subject to consolidation and rapid technological and regulatory change, and our inability or failure to adjust to our customers’ changing needs could reduce demand for our services.

We derive, and anticipate that we will continue to derive, a substantial portion of our revenue from customers in the telecommunications and utilities industries.  The telecommunications and utilities industries are subject to rapid changes in technology and governmental regulation.  Changes in technology may reduce the demand for the services we provide.  For example, new or developing technologies could displace the wireline systems used for the transmission of voice, video and data, and improvements in existing technology may allow telecommunications providers to significantly improve their networks without physically upgrading them.  Alternatively, our customers could perform more tasks themselves, which would cause our business to suffer.  Additionally, the telecommunications and utilities industries have been characterized by a high level of consolidation that may result in the loss of one or more of our customers.  Our failure to rapidly adopt and master new technologies as they are developed in any of the industries we serve or the consolidation of one or more of our significant customers could adversely affect our business, financial condition, results of operations and prospects.
 
 
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Further, many of our telecommunications customers are regulated by the Federal Communications Commission (FCC), and other international regulators.  The FCC and other regulators may interpret the application of their regulations in a manner that is different than the way such regulations are currently interpreted and may impose additional regulations, either of which could reduce demand for our services and adversely affect our business and results of operations.

Economic downturns could cause capital expenditures in the industries we serve to decrease, which may adversely affect our business, financial condition, results of operations and prospects.

The demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the United States economy.  The United States economy is still recovering from a recession, and growth in United States economic activity has remained slow.  It is uncertain when these conditions will significantly improve.  The wireless telecommunications industry and the staffing services industry are both particularly cyclical in nature and vulnerable to general downturns in the United States and international economies.  Our customers are affected by economic changes that decrease the need for or the profitability of their services.  This can result in a decrease in the demand for our services and potentially result in the delay or cancellation of projects by our customers.  Slow-downs in real estate, fluctuations in commodity prices and decreased demand by end-customers for services could affect our customers and their capital expenditure plans.  As a result, some of our customers may opt to defer or cancel pending projects.  A downturn in overall economic conditions also affects the priorities placed on various projects funded by governmental entities and federal, state and local spending levels.

In general, economic uncertainty makes it difficult to estimate our customers’ requirements for our services.  Our plan for growth depends on expanding our company both in the United States and internationally.  If economic factors in any of the regions in which we plan to expand are not favorable to the growth and development of the telecommunications industries in those countries, we may not be able to carry out our growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Financial Results and Financing Plans

We have a history of losses and may continue to incur losses in the future, raising substantial doubts about our ability to continue as a going concern.

We have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our common stock.  We incurred losses from operations of $2.8 million and $5.4 million for the years ended December 31, 2012 and 2011, respectively.  We incurred a net loss attributable to common stockholders of $2.1 million and $6.4 million for the years ended December 31, 2012 and 2011, respectively.  As of December 31, 2012, our stockholder’s deficit was $3.3 million.  We may continue to incur operating losses in future periods. These losses may increase and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the telecommunications industry and other factors described elsewhere in this “Risk Factors” section.  These factors raise substantial doubt that we will be able to continue operations as a going concern, and our independent registered public accountants included an explanatory paragraph regarding this uncertainty in their report on our financial statements for the year ended December 31, 2012.  Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing operating expenses.

We may never achieve profitability, and if we do, we may not be able to sustain such profitability.  Further, we may incur significant losses in the future due to the other risks described in this report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events.  If we cannot continue as a going concern, our stockholders may lose their entire investment.

We have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future.  If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

We have historically had a small internal accounting and finance staff with limited experience in public reporting.  This lack of adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial reporting.  A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.  In connection with the audit of our financial statements for the years ended December 31, 2012 and 2011, our management team identified material weaknesses relating to (i) the ability to prepare and timely issue the required filings with the Securities and Exchange Commission, (ii) the Company lacking the appropriate technical resources to properly evaluate transactions in accordance with generally accepted accounting principles and, (iii) the Company lacking a review function. We have taken steps, including the hiring of a Chief Financial Officer and implementing an improved segregation of duties, and plan to continue to take additional steps, to seek to remediate these material weaknesses for the year ending December 31, 2013 and to improve our financial reporting systems and implement new policies, procedures and controls.  If we do not successfully remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.
 
 
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Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.

As of December 31, 2012, we had total indebtedness of approximately $21.2 million, consisting of $0.6 million of bank debt, $16.0 million of notes payable and $4.6 million of contingent consideration for our completed acquisitions. Our substantial indebtedness could have important consequences to our stockholders.  For example, it could:

 
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;
 
 
increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business;
 
 
place us at a competitive disadvantage compared to our competitors that have less debt;
 
 
limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and
 
 
make us more vulnerable to a general economic downturn than a company that is less leveraged.
 
A high level of indebtedness would increase the risk that we may default on our debt obligations.  Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance.  General economic conditions and financial, business and other factors affect our operations and our future performance.  Many of these factors are beyond our control.  We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt.  Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital.

Our term loan imposes restrictions on us, which may prevent us from engaging in beneficial transactions.

We have a term loan pursuant to a Loan and Security Agreement, dated as of September 17, 2012 and amended as of November 13, 2012 and March 21, 2013, among our company, our subsidiaries, as guarantors, the lenders party thereto and MidMarket Capital Partners, LLC, as agent, or collectively, the “MidMarket Loan Agreement,” which provides for a maximum borrowing of $15.0 million.  At December 31, 2012, $15.0 million was outstanding under the MidMarket Loan Agreement.

The terms of the MidMarket Loan Agreement contain covenants that restrict our ability to, among other things:

 
make certain payments, including the payment of dividends;
 
 
redeem or repurchase our capital stock;
 
 
incur additional indebtedness and issue preferred stock;
 
 
make investments or create liens;
 
 
merge or consolidate with another entity;
 
 
sell certain assets; and
 
 
enter into transactions with affiliates.
 
In addition, the MidMarket Loan Agreement requires us to comply with a consolidated leverage ratio and a consolidated interest coverage ratio.  These covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions and securing additional financing, if needed.  We have in the past breached certain covenants under the MidMarket Loan Agreement that have resulted in various events of default under such agreement, which events of default have either been cured or waived by the lenders thereunder.  As of the date of this filing, we were not in default of any of the covenants.  Any additional breach of any of these covenants could result in new defaults or events of default under the notes and the MidMarket Loan Agreement, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed, together with accrued interest, to be due and payable.  If we were unable to repay such borrowings or interest, the lenders could proceed against their collateral.  Further, if the indebtedness under the MidMarket Loan Agreement were to be accelerated, our assets may not be sufficient to repay such indebtedness in full.
 
 
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Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.

To prepare financial statements in conformity with GAAP, management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities.  Areas requiring significant estimates by our management include:

 
contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims;
 
 
provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others;
 
 
valuation of assets acquired and liabilities assumed in connection with business combinations; and
 
 
accruals for estimated liabilities, including litigation and insurance reserves.
 
At the time the estimates and assumptions are made, we believe they are accurate based on the information available.  However, our actual results could differ from, and could require adjustments to, those estimates.

Risks Related to Our Operating History and Results of Operations

Our limited operating history as an integrated company, recent acquisitions and the rapidly-changing telecommunications market may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects, and also impairs our ability to accurately forecast our future performance.

Although we were incorporated in 1999, we were a development stage company with limited operations until our 2010 merger with Digital Comm, Inc. (“Digital”).  We experienced rapid and significant expansion in the years ended December 31, 2011 and 2012 due to a series of strategic acquisitions.  We acquired ADEX and T N S in September 2012 and ERFS in December 2012, and we have definitive purchase agreements for the acquisitions of Telco and IPC.

As a result of our recent acquisitions, our financial results are heavily influenced by the application of the acquisition method of accounting.  The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair market value.  If our assumptions are incorrect, any resulting change or modification could adversely affect our financial conditions and/or results of operations.

Further, our limited operating history as an integrated company, combined with our short history operating as providers of staffing and cloud-based services, may not provide an adequate basis for investors to evaluate our business, financial condition, results of operations and prospects, and makes accurate financial forecasting difficult for us.  Because we operate in the rapidly-evolving telecommunications markets and because our business is rapidly changing due to a series of acquisitions, we may have difficulty in engaging in effective business and financial planning.  It may also be difficult for us to evaluate trends that may affect our business and whether our expansion may be profitable.  Thus, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

If we are unable to sustain our recent revenue growth rates, we may never achieve or sustain profitability.

We experienced significant growth in recent years, primarily due to our strategic acquisitions.  Our net revenue increased to $17.2 million in the year ended December 31, 2012, from $2.8 million in the year ended December 31, 2011.  In order to become profitable and maintain our profitability, we must, among other things, continue to increase our revenues.  We may be unable to sustain our recent revenue growth, particularly if we are unable to develop and market our specialty contracting and telecommunications staffing services, increase our sales to existing customers or, develop new customers. However, even if our revenues continue to grow, they may not be sufficient to exceed increases in our operating expenses or to enable us to achieve or sustain profitability.

Our inability to obtain additional capital may prevent us from completing our acquisition strategy and successfully operating our business; however, additional financings may subject our existing stockholders to substantial dilution.

Until we can generate a sufficient amount of revenue, if ever, we expect to finance our anticipated future strategic acquisitions through public or private equity offerings or debt financings.  Additional funds may not be available when we need them on terms that are acceptable to us, or at all.  If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more strategic acquisitions or business plans.  In addition, we could be forced to discontinue product development and reduce or forego attractive business opportunities.  To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.  In addition, debt financing, if available, may involve restrictive covenants.  We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.  Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.
 
 
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Our forecasts regarding the sufficiency of our financial resources to support our current and planned operations are forward-looking statements and involve significant risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section.  We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.  Our future funding requirements will depend on many factors, including, but not limited to, the costs and timing of our future acquisitions.

If we are unable to raise sufficient equity capital in the next fiscal quarter, we may be unable to consummate our proposed acquisitions of Telco and IPC, which could adversely affect our business, financial condition, results of operations and prospects.

In November 2012, we entered into definitive agreements to acquire Telco and IPC.  To consummate such acquisitions, we anticipate we will need to make cash payments at closing in the aggregate amount of approximately $17.5 million in the case of Telco and approximately $18.2 million in the case of IPC.  We expect to raise such funds through the sale of shares of our common stock in the public markets.  If we are unable to consummate a public offering of our common stock in a timely manner due to market conditions or otherwise, we may breach our purchase obligations under our definitive acquisition agreements relating to Telco and IPC, which could adversely affect our business, financial condition, results of operations and prospects.

We exercise judgment in determining our provision for taxes in the United States and Puerto Rico that are subject to tax authority audit review that could result in additional tax liability and potential penalties that would negatively affect our net income.

The amounts we record in intercompany transactions for services, licenses, funding and other items affects our tax liabilities.  Our tax filings are subject to review or audit by the U.S. Internal Revenue Service and state, local and foreign taxing authorities.  We exercise judgment in determining our worldwide provision for income and other taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain.  Examinations of our tax returns could result in significant proposed adjustments and assessment of additional taxes that could adversely affect our tax provision and net income in the period or periods for which that determination is made.

Risks Related to our Common Stock

An active trading market for our common stock may not develop, and our common stock is subject to the “penny stock” regulations under the Exchange Act.

Our common stock is not listed on any national securities exchange.  Our common stock is quoted on the OTC Bulletin Board, or OTCBB.  The OTCBB is an electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many OTC securities that are not listed on a national securities exchange.  Trading volume for our common stock is limited and OTCBB quotations for our common stock price may not represent the true market value of our common stock.  We cannot predict the extent to which investor interest in us will lead to the development of an active public trading market or how liquid that public market may become.  

Additionally, because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Exchange Act.  Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including making an individualized written suitability determination for the purchaser and receiving the purchaser’s written consent prior to the transaction.  Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks.  These requirements severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment.  In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.

Our stock price has fluctuated widely in recent years, and the trading price of our common stock is likely to continue to be volatile, which could result in substantial losses to investors and litigation.

In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance.  The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the trading price of our common stock.  In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility.  Factors that could cause the market price of our common stock to fluctuate significantly include:

 
the results of operating and financial performance and prospects of other companies in our industry;
 
 
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strategic actions by us or our competitors, such as acquisitions or restructurings;
 
 
announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
 
 
the public’s reaction to our press releases, other public announcements, and filings with the Securities and Exchange Commission;
 
 
market conditions for providers of services to telecommunications, utilities and cloud services customers;
 
 
lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the telecommunications services and staffing industry;
 
 
changes in government policies in the United States and, as our international business increases, in other foreign countries;
 
 
changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;
 
 
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
 
 
changes in accounting standards, policies, guidance, interpretations or principles;
 
 
any lawsuit involving us, our services or our products;
 
 
arrival and departure of key personnel;
 
 
sales of common stock by us, our investors or members of our management team; and
 
 
changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
 
Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance.  This may prevent you from being able to sell your shares at or above the price you paid for your shares of our common stock, if at all.  In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company.  Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.

The sale or availability for sale of substantial amounts of our common stock could adversely affect the market price of our common stock.

Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through common stock offerings.  Our executive officers and directors beneficially own, collectively, 67.6% of our outstanding common stock, giving effect to the conversion of any preferred stock or other convertible securities held by such officers or directors.  If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.

In addition, our Series B, C, E, F, G, H and I Preferred Stock are all convertible into common stock. See Note 14 to our consolidated financial statements.  As of March 28, 2013, there were also warrants to purchase an aggregate of 1,517,766 shares of our common stock at a weighted-average exercise price of $63.89 per share, of which warrants to purchase 749,542 shares at a weighted-average exercise price of $1.25 per share were exercisable as of such date. The conversion of a significant number of our shares of our outstanding preferred stock or exercise of warrants at prices below the market price of our common stock could adversely affect the price of shares of our common stock. Additional dilution may result from the issuance of shares of our capital stock in connection with acquisitions or in connection with other financing efforts. Any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder.

We are controlled by a small group of our existing stockholders, whose interests may differ from other stockholders. Our executive officers and directors will significantly influence our activities, and their interests may differ from your interests as a stockholder.

As of March 28, 2013, our executive officers and directors beneficially own, collectively, 67.6% of our outstanding common stock, giving effect to the conversion of any preferred stock or other convertible securities held by such officers or directors.
 
 
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Accordingly, these stockholders have had, and will continue to have, significant influence in determining the outcome of any corporate transaction or any other matter submitted for approval to our stockholders, including mergers, consolidations and the sale of our assets, director elections and other significant corporate actions.  They will also have significant influence in preventing or causing a change in control of our company.  In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us.  The interests of these stockholders may differ from your interests as a stockholder, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

Our amended and restated certificate of incorporation and amended and restated bylaws, and certain provisions of Delaware corporate law, as well as certain of our contracts, contain provisions that could delay or prevent a change in control even if the change in control would be beneficial to our stockholders.

Delaware law, as well as our amended and restated certificate of incorporation and amended and restated bylaws, contains anti-takeover provisions that could delay or prevent a change in control of our company, even if the change in control would be beneficial to our stockholders.  These provisions could lower the price that future investors might be willing to pay for shares of our common stock.  These anti-takeover provisions:

 
authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
 
 
prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
 
 
establish a three-tiered classified board of directors requiring that not all members of our board be elected at one time;
 
 
establish a supermajority requirement to amend our amended and restated bylaws and specified provisions of our amended and restated certificate of incorporation;
 
 
prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
 
 
establish limitations on the removal of directors;
 
 
empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
 
 
provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws;
 
 
provide that our directors will be elected by a plurality of the votes cast in the election of directors;
 
 
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by our stockholders at stockholder meetings;
 
 
limit the ability of our stockholders to call special meetings of stockholders; and
 
 
provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action, actions asserting a breach of fiduciary duty and certain other actions against us or any directors or executive officers.
 
Section 203 of the Delaware General Corporation Law, the terms of our stock incentive plans, the terms of our change in control agreements with our senior executives and other contractual provisions may also discourage, delay or prevent a change in control of our company.  Section 203 generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder.  Our stock incentive plans include change-in-control provisions that allow us to grant options or stock purchase rights that may become vested immediately upon a change in control.  The terms of changes of control agreements with our senior executives and contractual restrictions with third parties may discourage a change in control of our company.  Our board of directors also has the power to adopt a stockholder rights plan that could delay or prevent a change in control of our company even if the change in control is generally beneficial to our stockholders.  These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors.  If our board of directors adopts such a plan, it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.

Together, these charter, statutory and contractual provisions could make the removal of our management and directors amore difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.  Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our executive officers, key non-executive officer employees, and members of our board of directors, could limit the price that investors might be willing to pay in the future for shares of our common stock.  They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
 
 
24

 

We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock.

We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future.  We currently intend to retain any earnings to finance our operations and growth.  As a result, any short-term return on your investment will depend on the market price of our common stock, and only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders.  The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including, but not limited to, factors such as our financial condition, results of operations, capital requirements, business conditions, and covenants under any applicable contractual arrangements. Investors seeking cash dividends should not invest in our common stock.

If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock will likely decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts, over whom we have no control, publish about us and our business.  We may never obtain research coverage by securities and industry analysts.  If no securities or industry analysts commence coverage of our company, the market price for our common stock could decline.  In the event we obtain securities or industry analyst coverage, the market price of our common stock could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it is inaccurate, or cease publishing reports about us or our business.

ITEM 1B.     UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.        PROPERTIES.

Our principal executive offices are located in Boca Raton, Florida.  We have a five-year lease on our office premises, which commenced in August 2010.  Our executive offices occupy approximately 1,000 square feet at 2500 N. Military Trail, Suite 275, Boca Raton, Florida 33431.  We paid an annual base rent of $21,155 for the first year of our lease, and the rent escalates to $23,810 in the fifth year, together with additional annual rent of approximately $13,000.

Set forth below are the locations of the other properties leased by us, the businesses which use the properties, and the size of each such property.  All of such properties are used by our Company or by one of our subsidiaries principally as office facilities to house their administrative, marketing, and engineering and professional services personnel.  We believe our facilities and equipment to be in good condition and reasonably suited and adequate for our current needs.
 
Location
 
Owned or Leased
 
User
 
Size (Sq Ft)
Tuscaloosa, AL
 
Leased(1)
 
Rives-Monteiro Engineering, LLC
 
5,000
Miami, FL
 
Leased(2)
 
Tropical Communications, Inc.
 
6,000
Temple Terrace, FL
 
Leased(3)
 
Adex Corporation
 
2,500
Alpharetta, GA
 
Leased(4)
 
Adex Corporation
 
9,000
Des Plaines, IL
 
Leased(5)
 
T N S, Inc.
 
1,500
Upland, CA
 
Leased(6)
 
Adex Corporation
 
2,047
Frisco, TX
 
Leased(7)
 
Adex Corporation
 
1,100
Naperville, IL
 
Leased(8)
 
Adex Corporation
 
1,085
Alpharetta, GA
 
Licensed(9)
 
Adex Corporation
 
1,000
_________________
(1)
This facility is leased pursuant to a month-to-month lease that provides for monthly rental payments of $1,500 for the lease term.
 
(2)
This facility is leased pursuant to a one-year lease that expires in September 2013 and provides for aggregate rental payments of $1,792.25 per month for the lease term.
 
(3)
This facility is leased pursuant to a 38-month lease that expires in December 2015 and provides for aggregate rental payments of $3,645.83 per month for the lease term.
 
(4)
This facility is leased pursuant to a 36-month lease that expires in April 2014 and provides for aggregate rental payments of $8,440.00 per month for the first 12 months, $8,695.26 for the following 12 months and $8,956.12 for the final 12 months.
 
(5)
This facility is leased pursuant to one-year lease that expires in August 2013 and provides for monthly payments of $1,163.75 for the lease term.
 
 
25

 
 
(6)
This facility is leased pursuant to a one-year lease that expires in August 2013 and provides for aggregate rental payments of $2,251.70 per month for the lease term.
 
(7)
This facility is leased pursuant to a one-year lease that expires in May 2013 and provides for aggregate rental payments of $1,663.74 per month for the lease term.
 
(8)
This facility is leased pursuant to a two-year lease that expires in July 2014 and provides for aggregate rental payments of $1,627.50 per month for the first 12 months and $1,672.71 for the next 12 months.
 
(9)
This facility is licensed pursuant to a temporary license terminable by either party upon 30 days prior written notice and provides for aggregate payments of $200.00 per month.  ADEX is also required to reimburse the licensor for its pro rata share of all utilities.

ITEM 3.        LEGAL PROCEEDINGS.

We are not involved in any claims or proceedings outside the ordinary course of business, and none of such claims or proceedings are material.

ITEM 4.        MINE SAFETY DISCLOSURES.

Not Applicable.
 
 
26

 

PART II

ITEM 5.    
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is listed on the OTC Bulletin Board (OTCBB) under the symbol “ICLD.”  We have applied for the listing of our common stock on the NASDAQ Capital Market under the symbol “ICLD.”  The following table sets forth the high and low closing sales prices of our common stock as quoted by the OTCBB for the periods indicated.  Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.
 
Fiscal Year Ended December 31, 2011
 
High
   
Low
 
First Quarter
 
$
18.75
   
$
8.13
 
Second Quarter
 
$
31.25
   
$
6.56
 
Third Quarter
 
$
18.75
   
$
5.00
 
Fourth Quarter
 
$
9.00
   
$
10.06
 
`
           
Fiscal Year Ended December 31, 2012
               
First Quarter
 
$
3.49
   
$
0.01
 
Second Quarter
 
$
0.94
   
$
0.01
 
Third Quarter
 
$
2.63
   
$
0.01
 
Fourth Quarter
 
$
5.13
   
$
0.02
 
 
As of March 27, 2013, the closing sale price of our common stock, as reported by the OTCBB, was $3.35 per share after giving effect to our one-for-125 revenue stock split that occurred on January 14, 2013.

Holders

At March 28, 2013, we had approximately 149 record holders of our common stock.  The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers or registered clearing agencies. 

Transfer Agent and Registrar

We have appointed Corporate Stock Transfer, 3200 Cherry Creek Dr. South, Denver, CO 80209 to act as the transfer agent of our common stock.

Dividend Policy

We currently intend to retain future earnings, if any, for use in the operation of our business and to fund future growth.  We have never declared or paid cash dividends on our common stock and we do not intend to pay any cash dividends on our common stock for the foreseeable future.  The terms of the MidMarket Loan Agreement prohibit our payment of cash dividends.  Any future determination related to our dividend policy will be made at the discretion of our board of directors in light of conditions then-existing, including factors such as our results of operations, financial conditions and requirements, business conditions and covenants under any applicable contractual arrangements.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans as of December 31, 2012.
 
Plan Category
 
(a)
Number of Securities to be Issued Upon Exercise of Outstanding Options
   
(b)
Weighted- Average Exercise Price of Outstanding Options
   
(c)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column(a))
 
Equity compensation plans approved by security holders
    -       -       2,500,000  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    -       -       2,500,000  
 
 
27

 

ITEM 6.        SELECTED FINANCIAL DATA

The following tables set forth selected consolidated financial data for us for the years ended December 31, 2012 and 2011.  The selected consolidated financial data for the fiscal years ended December 31, 2012 and 2011 were derived from our audited consolidated financial statements included elsewhere in this report.  The financial data set forth below should be read in conjunction with, and are qualified in their entirety by, reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical financial statements and related notes included elsewhere in this report. 
 
   
For the years ended
December 31,
 
   
2012
   
2011
 
Statement of Operations Data:
       
(Restated)
 
             
Revenues
 
$
17,235,585
   
$
2,812,210
 
Gross profit
   
5,176,486
     
961,192
 
Operating expenses
   
7,938,345
     
6,343,931
 
Loss from operations
   
(2,761,859
)
   
(5,382,739
)
Other expense, net
   
(1,047,324
)
   
(1,021,889
)
Net loss before benefit for income taxes and equity earning/loss in affiliate
   
(3,809,183
)
   
(6,404,628
)
Benefit for income taxes
   
(2,646,523
)
   
-
 
Dividends on preferred stock
   
(843,215
)
   
-
 
Net loss attributable to common stockholders
   
(2,072,862
)
   
(6,404,628
)
Loss per share, basic and diluted
 
$
(1.33
)
 
$
(6.38
)
Basic and diluted weighted average shares outstanding
   
1,553,555
     
1,003,264
 
 
   
As of
December 31,
 
   
2012
   
2011
 
Balance Sheet Data:
       
(Restated)
 
             
Cash
 
$
646,978
   
$
89,285
 
Accounts receivable
   
8,481,999
     
347,607
 
Total current assets
   
9,666,325
     
456,585
 
Goodwill and intangible assets, net
   
29,667,823
     
1,146,117
 
Total assets
   
41,866,243
     
2,245,545
 
                 
Total current liabilities
   
13,410,481
     
2,357,618
 
Other liabilities, including long-term debt
   
14,601,711
     
1,672,900
 
Temporary equity
   
16,584,704
     
620,872
 
Stockholders’ deficit
   
(3,288,586
)
   
(2,405,845
)

ITEM 7.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This management’s discussion and analysis of financial condition and results of operations contains certain statements that are forward-looking in nature relating to our business, future events or our future financial performance.  Prospective investors are cautioned that such statements involve risks and uncertainties and that actual events or results may differ materially from the statements made in such forward-looking statements.  In evaluating such statements, prospective investors should specifically consider the various factors identified in this report, including the matters set forth under Item 1A “Risk Factors,” which could cause actual results to differ from those indicated by such forward-looking statements.

Overview

We were incorporated in 1999, but functioned as a development stage company with limited activities through December 2009.  In January 2010, we acquired Digital Comm, Inc. (“Digital”), a provider of specialty contracting services primarily in the installation of fiber optic telephone cable.  Until September 2012, substantially all of our revenue came from our specialty contracting services.  In the year ending December 31, 2012, primarily as a result of our acquisition of ADEX, approximately 39% of our revenue was derived from specialty contracting services, with the remaining 61% coming from our telecommunications staffing services.
 
 
28

 

We operate in one reportable segment as a specialty contractor and staffing service, providing engineering, construction, maintenance and installation services to telecommunications providers and underground facility locating services, as well as related staffing services to various utilities, including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.  All of our operating divisions have been aggregated into one reporting segment due to their similar economic characteristics, products, production methods and distribution methods.

Our revenue increased from $2.8 million for the year ended December 31, 2011 to $17.2 million for the year ended December 31, 2012.  Our net loss attributable to common stockholders decreased from $6.4 million for the year ending December 31, 2011 to $2.1 million for the year ended December 31, 2012.  As of December 31, 2012, our accumulated deficit was $12.5 million.  A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years.  We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers.  Master service agreements generally contain customer-specified service requirements, such as discrete pricing for individual tasks.  To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility.  In most cases, a customer may terminate an agreement for convenience with written notice.  The remainder of our services are provided pursuant to contracts for specific projects.  Long-term contracts relate to specific projects with terms in excess of one year from the contract date.  Short-term contracts for specific projects are generally of three to four months in duration.

During 2012, the majority of our revenue and expenses came from our acquired companies.  Of the $17.2 million in revenue during 2012, $16.7 million came from the companies we acquired in 2011 and 2012.

Cost of revenues from the companies acquired in the years ended December 31, 2011 and 2012, accounted for $11.0 million of our $12.0 million cost of revenues during the year ended December 31, 2012.

Gross profit from the companies acquired in the years ended December 31, 2011 and 2012, accounted for $5.0 million of our $5.2 million gross profit during the year ended December 31, 2012.

Operating expenses, including salaries and wages and depreciation and amortization from the companies acquired in the years ended December 31, 2011 and 2012, accounted for $4.2 million of our $7.9 million of operating expenses during the year ended December 31, 2012.

The following table summarizes our revenues from multi-year master service agreements and other long-term contracts, as a percentage of contract revenues: 
 
   
Year ended December 31,
 
   
2012
   
2011
 
Multi-year master service agreements
   
60
%
   
59
%
Total long-term contracts
   
60
%
   
59
%

The percentage of revenue from long-term contracts varies between periods, depending on the mix of work performed under our contracts.  

A significant portion of our revenue comes from several large customers.  The following table reflects the percentage of total revenue from those customers that contributed at least 10% to our total revenue in the years ended December 31, 2012 and 2011:
 
   
Year ended December 31,
 
   
2012
   
2011
 
Verizon Communications, Inc.
   
7
%
   
56
%
Ericsson, Inc.
   
33
%
   
0
%
Danella Construction
   
0
%
   
17
%
Nexlink
   
14
%
   
0
%
 
Telecommunications providers and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring. As a result, we believe there is significant opportunity to expand both our United States and international telecommunications solutions services and staffing services capabilities. As we continue to expand our presence in the marketplace, we will target those customers going through new network deployments and wireless service upgrades.
 
 
29

 

We expect to continue to increase our gross margins on our specialty contracting services by leveraging our single-source end-to-end network to efficiently provide a full spectrum of telecommunications contracting and staffing services to our customers. We believe this will alleviate some of the inefficiencies typically present in our industry, which result, in part, from the highly-fragmented nature of the telecommunications industry, limited access to skilled labor and the difficulty of managing multiple specialty-service providers to address our customers’ needs. As a result, we believe we can provide superior service to our customers and eliminate certain redundancies and costs for them.  We believe our ability to address a wide range of end-to-end solutions network, infrastructure and project staffing service needs for our telecommunications industry clients is a key competitive advantage. Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, and installation and integration services) allows customers to turn to a single source for these specific specialty services, as well as to entrust us with the execution of entire turn-key solutions.

As a result of our recent acquisitions, we have become a multi-faceted company with an international presence.  We believe this platform will allow us to leverage our corporate and other fixed costs and capture gross margin benefits.  Our platform is highly scalable.  We typically hire workers to staff projects on a project-by-project basis and our other operating expenses are primarily fixed.  Accordingly, we are generally able to deploy personnel to infrastructure projects in the United States and beyond without incremental increases in operating costs, allowing us to achieve greater margins. We believe this business model enables us to staff our business efficiently to meet changes in demand.

Finally, given the worldwide popularity of telecommunications and wireless products and services, we will selectively pursue international expansion, which we believe represents a compelling opportunity for additional long-term growth.

Our planned expansion will place increased demands on our operational, managerial, administrative and other resources.  Managing our growth effectively will require us to continue to enhance our operations management systems, financial and management controls and information systems and to hire, train and retain skilled telecommunications personnel.  The timing and amount of investments in our expansion could affect the comparability of our results of operations in future periods.

Our recent acquisitions and planned acquisitions have been timed with the additions to our management team of skilled professionals with deep industry knowledge and a strong track record of execution.  Our senior management team brings an average of over 25 years of individual experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.

Factors Affecting Our Performance

Changes in Demand for Data Capacity and Reliability.

The telecommunications industry has undergone and continues to undergo significant changes due to advances in technology, increased competition as telephone and cable companies converge, the growing consumer demand for enhanced and bundled services and increased governmental broadband stimulus funding.  As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services.

Telecommunications network operators are increasingly relying on the deployment of fiber optic cable technology deeper into their networks and closer to consumers in order to respond to demands for capacity, reliability and product bundles of voice, video and high-speed data services.  Fiber deployments have enabled an increasing number of cable companies to offer voice services in addition to their traditional video and data services. These voice services require the installation of customer premise equipment and, at times, the upgrade of in-home wiring.  Additionally, fiber deployments are also facilitating the provisioning of video services by local telephone companies in addition to their traditional voice and high-speed data services.  Several large telephone companies have pursued fiber-to-the-premise and fiber-to-the-node initiatives to compete actively with cable operators. These long-term initiatives and the likelihood that other telephone companies will pursue similar strategies present opportunities for us.

Cable companies are continuing to target the provision of data and voice services to residential customers and have expanded their service offerings to business customers.  Often times, these services are provided over fiber-optic cables using “metro Ethernet” technology.  The commercial geographies that cable companies are targeting for network deployments generally require incremental fiber optic cable deployment and, as a result, require the type of engineering and construction services that we provide.

The proliferation of smart phones and other wireless data devices has driven demand for mobile broadband. This demand and other advances in technology have prompted wireless carriers to upgrade their networks.  Wireless carriers are actively increasing spending on their networks to respond to the explosion in wireless data traffic, upgrade network technologies to improve performance and efficiency and consolidate disparate technology platforms. These customer initiatives present long-term opportunities for us for the wireless services we provide. Further, the demand for mobile broadband has increased bandwidth requirements on the wired networks of our customers. As the demand for mobile broadband grows, the amount of cellular traffic that must be “backhauled” over customers’ fiber and coaxial networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites.  These trends are increasing the demand for the types of services we provide.
 
 
30

 

Our Ability to Recruit, Manage and Retain High Quality Telecommunications Personnel.

The shortage of skilled labor in the telecommunications industry and the difficulties in recruiting and retaining skilled personnel can frequently limit the ability of specialty contractors to bid for and complete certain contracts.  In September 2012, we acquired ADEX, a telecommunications staffing firm. Through ADEX, we manage a database of more than 70,000 telecom personnel, which we use to locate and deploy skilled workers for projects.  We believe our access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.  However, our ability to continue to take advantage of this labor pool will depend, in part, on our ability to successfully integrate ADEX into our business.

Our Ability to Integrate Our Acquired Businesses and Expand Internationally.

We completed five acquisitions since August 2011 and plan to consummate additional acquisitions in the near term.  Our success will depend, in part, on our ability to successfully integrate these businesses into our global telecommunications platform. In addition, we believe international expansion represents a compelling opportunity for additional growth over the long-term because of the worldwide need for telecommunications infrastructure.  As of December 31, 2012, our operations in Puerto Rico have generated $887,000 in revenue.  We plan to expand our global presence either through expanding our current operations or by acquiring subsidiaries with international platforms.

Our Ability to Expand and Diversify Our Customer Base.

Our customers for specialty contracting services consist of leading telephone, wireless, cable television and data companies.  Ericsson Inc. is our principal telecommunications staffing services customer.  Historically, our revenue has been significantly concentrated in a small number of customers.  Although we still operate at a net loss, our revenue in recent years has increased as we have acquired additional subsidiaries and diversified our customer base and revenue streams. The percentage of our revenue attributable to our top 10 customers, as well as key customers that contributed at least 10% of our revenue in at least one of the years specified in the following table, were as follows:
 
Customer:
 
Year ended December 31,
 
   
2012
   
2011
 
Top 10 customers, aggregate
   
77
%
   
97
%
Customer:
               
Verizon Communications, Inc.
   
7
%
   
56
%
Danella Construction
   
0
%
   
17
%
Nexlink
   
14
%
   
0
%
Ericsson, Inc.
   
33
%
   
 
 
Business Unit Transitions.

In the year ended December 31, 2011, 100% of our revenue came from our specialty contracting services. In the year ended December 31, 2012, approximately 39% of our revenue came from specialty contracting services, and the remaining 61% come from our telecommunications staffing services.  This change in focus is primarily attributable to our acquisition of ADEX.  Due to the shift of our business focus from exclusively providing specialty contracting services to also providing professional staffing services, we have expanded our customer base.

In addition, we have acquired four other companies since August 2011, and each of these acquisitions has either enhanced certain of our existing business units or allowed us to gain market share in new lines of business. For example, our acquisition of T N S in September 2012 extended the geographic reach of our structured cabling and digital antenna system services.  Our proposed acquisition of IPC will allow us to improve our systems integration capabilities.  Our proposed acquisition of Telco will further expand our professional staffing business and our access to skilled labor.

We expect these acquisitions to facilitate geographic diversification that should protect against regional cyclicality.  We believe our diverse platform of services, capabilities, customers and geographies will enable us to grow as the market continues to evolve.

The table below summarizes the revenues for each of our product lines for the years ended December 31, 2012 and 2011.
 
   
Year ended December 31,
 
   
2012
 
2011
 
Revenue from:
 
Specialty contracting services
 
$
6,658,388
   
$
2,812,210
 
Telecommunications staffing services
   
10,577,197
     
 
As a percentage of total revenue:
               
Specialty contracting services
   
39
%
   
100
%
Telecommunications staffing services
   
61
%
   
0
%
 
 
31

 
 
With our acquisition of ADEX in September 2012, we believe our revenue generated from telecommunications staffing services will continue to increase as a percentage of our overall revenue.

Impact of Pending and Recently-Completed Acquisitions

We have grown significantly and expanded our service offerings and geographic reach through a series of strategic acquisitions.  Since January 1, 2011, we have completed five acquisitions.  We expect to regularly review opportunities, and periodically to engage in discussions, regarding possible additional acquisitions.  Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire and successfully integrate companies.

We intend to operate all of the companies we acquire in a decentralized model in which the management of the companies will remain responsible for daily operations while our senior management will utilize their deep industry expertise and strategic contacts to develop and implement growth strategies and leverage top-line and operating synergies among the companies, as well as provide overall general and administrative functions.

In November 2012, we executed definitive agreements to acquire Telco and IPC, which acquisitions which we intend to complete within 90 days of the date of this report.  After the completion of the Telco and IPC acquisitions and reflecting the consolidation of these entities in our results of operations, we expect our revenues, cost of revenues and operating expenses will increase substantially.  Accordingly, our future results of operations may differ significantly from those described in this report.  The impact of the pending acquisitions is not reflected in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the impact of a completed acquisition is only included from the period commencing on the acquisition date.  The unaudited pro forma combined condensed financial information included in this report is not intended to represent what our results of operations would have been if the acquisitions had occurred on January 1, 2012 or to project our results of operations for any future period. Since we and each of these entities were not under common control or management for any period presented, the unaudited pro forma combined condensed financial results may not be comparable to, or indicative of, future performance.

General Economic Conditions.

Within the context of a slowly-growing economy and the current volatility in the credit and equity markets, we believe the latest trends and developments support our steady industry outlook. We will continue to closely monitor the effects that changes in economic and market conditions may have on our customers and our business and we will continue to manage those areas of the business we can control.

Components of Results of Operations

Revenue.

In the year ended December 31, 2011, we derived virtually all of our revenue from our specialty contracting services.  In the year ended December 31, 2012, we derived approximately 39% of our revenue from our specialty contracting services and approximately 61% of our revenue from our telecommunications staffing and training services.

Cost of Revenues.

Cost of revenues in the year ended December 31, 2012 was 70% of revenues as compared to 66% in the year ended December 31, 2011, primarily due to lower margins in our telecommunications staffing business.  Cost of revenues in the telecommunications staffing business was 71% of revenues in the year ended December 31, 2012.  We are trying to increase efficiency in the year ending December 31, 2013 and will focus our efforts on improving margins.  Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.

We retain the risk of loss, up to certain limits, for claims related to automobile liability, general liability, workers’ compensation, employee group health and location damages.  We are sometimes subject to claims for damages resulting from property and other damages arising in connection with our specialty contracting services.  A change in claims experience or actuarial assumptions related to these risks could materially affect our results of operations. 

For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools and equipment.  Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of revenues.  We expect cost of revenue to continue to increase if we succeed in continuing to grow our revenue.
 
 
32

 

General and Administrative Costs.

General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries’ management personnel and administrative overhead.  These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense and other costs that are not directly related to performance of our services under customer contracts.  Our senior management, including the senior managers of our subsidiaries, perform substantially all of our sales and marketing functions as part of their management responsibilities and, accordingly, we have not incurred material sales and marketing expenses.  Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency.  We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenues will decrease if we succeed in increasing revenues.  Between January 1, 2012 and December 31, 2012, we increased our workforce by 346 employees, primarily as a result of the acquisitions of ADEX and its affiliated entities and T N S, which will increase ongoing headcount-related expenses.

Goodwill and Intangible Assets.

We perform our annual impairment review of goodwill and certain intangible assets with indefinite lives during the fourth quarter of each year. The assets of each of our acquired businesses and the related goodwill are assigned to the applicable reporting unit at the date of acquisition.  We identify our reporting units by assessing whether businesses holding purchased assets, including goodwill, and related assumed liabilities have discrete financial information available.  We estimate the fair value of each reporting unit and compare the fair value to its carrying value, including goodwill. If the carrying value exceeds the fair value, the value of the reporting units’ goodwill or other indefinite-lived intangibles may be impaired and written down.  Our goodwill resides in multiple reporting units.  The profitability of individual reporting units may suffer periodically from downturns in customer demand and other factors resulting from the cyclical nature of our business, the high level of competition existing within our industry, the concentration of our revenues within a limited number of customers and the level of overall economic activity.  During times of economic slowdown, our customers may reduce their capital expenditures and defer or cancel pending projects.  Individual reporting units may be relatively more impacted by these factors than the company as a whole.  As a result, demand for the services of one or more of our reporting units could decline, resulting in an impairment of goodwill or intangible assets.

We review finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicates that the carrying amount of such assets may not be fully recoverable.  Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition.  An impairment loss is measured by comparing the fair value of the asset to its carrying value.  If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred.  Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.

We performed our required annual goodwill impairment test as of December 31, 2011 and 2012 and found no impairment existed.

Fair Value of Embedded Derivatives.

We used the Black-Scholes option-pricing model to determine the fair value of the derivative liability related to the warrants and the put and effective price of future equity offerings of equity-linked financial instruments. We derived the fair value of warrant using the common stock price, the exercise price of the warrants, risk-free interest rate, the historical volatility, and our dividend yield. We do not have sufficient historical data to use our historical volatility; therefore the expected volatility is based on the historical volatility of comparable companies. We developed scenarios to take into account estimated probabilities of future outcomes. The fair value of the warrant liabilities is classified as Level 3 within our fair value hierarchy.

Pursuant to the MidMarket Loan Agreement, we issued warrants to the lenders, which entitle the lenders to purchase a number of shares of common stock equal to 10% of the fully-diluted shares of our common stock on the date on which such warrants first became exercisable, which was on December 6, 2012.  The warrants were amended on November 13, 2012 as part of the first amendment to the MidMarket Loan Agreement.  At that time, the number of shares issuable upon exercise of such warrants was increased from 10% of the fully-diluted shares to 11.5% of the fully-diluted shares. The warrants have an exercise price of $1.25 per share, subject to adjustment as set forth in the warrants, and will expire on September 17, 2014 provided certain conditions are met.  The warrants have anti-dilution rights in connection with the exercise price.  The fair value of the anti-dilution rights is immaterial.  If we issue stock, warrants or options at a price below the $1.25 per share exercise price, the price of the warrants resets to the lower price.  As of March 22, 2013, the lenders have not exercised the warrants. These warrants meet the criteria in accordance with ASC 480 to be classified as liabilities because there is a put feature where we have an obligation to repurchase such shares. The derivative liability associated with this debt will be revalued each reporting period and the increase or decrease will be recorded to the consolidated statement of operations under the caption (change in fair value of derivative instruments.)
 
 
33

 

On September 17, 2012, when the warrants were issued, we recorded a derivative liability in the amount of $193,944.  The amount was recorded as a debt discount and is being amortized over the life of the loan.  The amount of the derivative liability was computed by using the Black-Scholes Option pricing model to determine the value of the warrants issued.

Additionally, we issued to UTA Capital LLC warrants to purchase 16% of our common stock on a fully-diluted basis, up to a maximum of 167,619 shares of our common stock, which were exercisable at $18.75 per share and provided for cashless exercise.  We have evaluated the anti-dilution provisions of such warrants and deemed their impact to be immaterial. The relative fair value of the warrants was calculated using the Black-Scholes Option pricing model.  This amount, totaling approximately $872,311, has been recorded as a derivative liability and debt discount and charged to interest expense over the life of the related promissory note. The warrants issued to UTA Capital LLC do not meet the criteria to be classified as equity in accordance with ASC 815-40-15-7D and are classified as derivative liabilities at fair value and should be marked to market because they are not indexed to our stock as the settlement amount is not fixed due to the variability of the number of shares issuable pursuant to such warrant.  The derivative liability associated with this debt will be revalued each reporting period and the increase or decrease will be recorded to our consolidated statement of operations under the caption “change in fair value of derivative instruments”.

On February 14, 2011, we entered into an extension and modification agreement with UTA Capital LLC in connection with our outstanding note payable to UTA Capital LLC, which had a balance of $775,000 at December 31, 2010.  The modification agreement provided for an extension of the original maturity date of the note from August 6, 2011 to September 30, 2011. In exchange for consenting to the modification agreement, UTA Capital LLC was granted 10,257 shares of our common stock, which had a fair value of $153,850 and was recorded as a debt discount. Additionally, as additional consideration for our failure to satisfy a certain covenant in the agreement, UTA Capital LLC was granted 4,000 shares of our common stock, which shares were recorded as an expense as penalty paid to the lender.  As of December 31, 2011, these two additional grants of shares had not been physically issued.  However, such shares are reflected on the accompanying financial statements as if issued.  This amendment was accounted for as an extinguishment and therefore the unamortized deferred loan costs of $53,848, debt discount from the original agreement of $509,849 and debt discount from this amendment of $153,850 were expensed.

We account for the conversion features included in our warrants as derivative liabilities.  The aggregate fair value of derivative liabilities as of December 31, 2012 and 2011 amounted to $38,557 and $33,593, respectively.

Income Taxes.

In the year ended December 31, 2012, we booked a provision for state and local income taxes due of $133,495.  Certain states do not recognize net operating loss carryforwards, and we have operations in some of those states.  The provision for state and local income taxes was offset by an increase in deferred tax liabilities of $2,780,018.  This tax benefit was a result of our acquisition of ADEX and TNS in 2012, which resulted in a deferred tax liability based on the value of the intangible assets acquired.  This benefit was offset by the fact that ADEX and TNS were cash-basis taxpayers when they were acquired and were converted to accrual-basis taxpayers upon acquisition, which resulted in an increase in liability.  As of December 31, 2012 and 2011, we had net operating loss carryforwards (NOLs) of $5.6 million and $5.0 million, respectively, which will be available to reduce future taxable income and expense through 2030.  Utilization of the net operating loss and credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions.  The annual limitation may result in the expiration of the net operating loss carryforwards before utilization.  We have adjusted our deferred tax asset to record the expected impact of the limitations.

Credit Risk.

We are subject to concentrations of credit risk relating primarily to our cash and equivalents, accounts receivable, other receivables and costs and estimated earnings in excess of billings.  Cash and equivalents primarily include balances on deposit in banks.  We maintain substantially all of our cash and equivalents at financial institutions we believe to be of high credit quality.  To date, we have not experienced any loss or lack of access to cash in our operating accounts.

We grant credit under normal payment terms, generally without collateral, to our customers.  These customers primarily consist of telephone companies, cable broadband MSOs and electric and gas utilities.  With respect to a portion of the services provided to these customers, we have certain statutory lien rights that may, in certain circumstances, enhance our collection efforts.  Adverse changes in overall business and economic factors may impact our customers and increase potential credit risks.  These risks may be heightened as a result of economic uncertainty and market volatility. In the past, some of our customers have experienced significant financial difficulties and, likewise, some may experience financial difficulties in the future.  These difficulties expose us to increased risks related to the collectability of amounts due for services performed.  We believe that none of our significant customers were experiencing financial difficulties that would materially impact the collectability of our trade accounts receivable as of December 31, 2012.
 
 
34

 

Contingent Consideration.

We recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree or assets of the acquiree in a business combination.  The contingent consideration is classified as either a liability or equity in accordance with ASC 480-10 (“Accounting for certain financial instruments with characteristics of both liabilities and equity “).  If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until the contingency is resolved.  Increases in fair value are recorded as losses on our consolidated statement of operations, while decreases are recorded as gains.  If classified as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.

Litigation and Contingencies.

Litigation and contingencies are reflected in our consolidated financial statements based on management’s assessment of the expected outcome of such litigation or expected resolution of such contingency.  An accrual is made when the loss of such contingency is probable and reasonably estimable. If the final outcome of such litigation and contingencies differs significantly from our current expectations, such outcome could result in a charge to earnings.

Results of Operations

The following table shows our results of operations for the year indicated.  The historical results presented below are not necessarily indicative off the results that may be expected for any future period.
 
   
Year ended December 31,
 
   
2012
   
2011
 
         
(Restated)
 
Revenue
 
$
17,235,585
   
$
2,812,210
 
                 
Cost of revenues
   
12,059,099
     
1,851,018
 
Gross profit
   
5,176,486
     
961,192
 
                 
Operating expenses:
               
Depreciation and amortization
   
348,172
     
39,229
 
Salaries and wages
   
3,802,158
     
5,053,600
 
General and administrative
   
3,788,015
     
1,251,102
 
Total operating expenses
   
7,938,845
     
6,343,931
 
                 
Loss from operations
   
(2,761,859
)
   
(5,382,739
)
                 
Total other expense
   
(1,047,324
)
   
(1,021,889
)
Net loss before benefit for income taxes and equity loss in affiliate
   
(3,809,183
)
   
(6,404,628
)
                 
Benefit for income taxes
   
(2,646,523
)
   
-
 
                 
Net loss
   
(1,162,660
)
   
-
 
                 
Net loss attributable to non-controlling interest
   
(16,448
)
   
-
 
                 
Equity loss attributable to affiliate
   
(50,539
)
   
-
 
                 
Net loss attributable to InterCloud Systems, Inc.
   
(1,229,647
)
   
(6,404,628
)
                 
Less dividends on Series C, D, E, F and H Preferred Stock
   
(843,215
)
   
-
 
                 
Net loss attributable to InterCloud Systems, Inc. common stockholders
 
$
(2,072,862
)
 
$
(6,404,628
)

Year ended December 31, 2012 compared to year ended December 31, 2011

Revenue.
 
   
Year ended December 31,
   
Change
 
   
2012
   
2011
   
Dollars
   
Percentage
 
Specialty contracting services
 
$
6,658,388
   
$
2,812,210
   
$
3,846,178
     
137
%
Telecommunication staffing services
   
10,577,197
     
--
     
10,577,197
     
100
%
Total
 
$
17,235,585
   
$
2,812,810
   
$
14,423,375
     
513
%
 
 
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Total revenue for the year ended December 31, 2012 was $17.2 million, which represented an increase of $14.4 million, or 513%, compared to total revenue of $2.8 million for the year ended December 31, 2011.  The increase in total revenue during this period was attributed to revenue generated by our acquired companies.  For the year ended December 31, 2011, substantially all of our revenue was derived from our specialty contracting services, while for the year ended December 31, 2012, 39% of our revenue was derived from our specialty contracting services and 61% of our revenue was derived from our telecommunications staffing services.  This change in telecommunication staffing revenue was a result of our acquisition of ADEX in September 2012.

Cost of revenue and gross profit.
 
   
Year ended December 31,
   
Change
 
   
2012
   
2011
   
Dollars
   
Percentage
 
Cost of revenue
 
$
12,059,099
   
$
1,851,018
   
$
10,208,081
     
552
%
Gross profit
 
$
5,176,486
   
$
961,192
   
$
4,215,294
     
439
%
Gross profit percentage
   
30%
     
34%
                 

Our cost of revenue increased $10.2 million from $1.9 million for the year ended December 31, 2011 to $12.1 million for the year ended December 31, 2012.  This increase was primarily due to the acquisitions completed in the years ended December 31, 2011 and 2012.  For the year ending December 31, 2011, all of our operations were in the specialty contracting services division.  For the year ended December 31, 2012, we had a revenue mix of 39% specialty contracting services as compared to telecommunications staffing services of 61%, primarily as a result of our acquisition of ADEX.

Gross profit dollars from our specialty contracting services business increased primarily due to increased revenue.   Specialty contracting services accounted for 100% of our revenue in the year ended December 31, 2011 and accounted for 39% of our revenue for the year ended December 31, 2012.  The change was a result of the acquisition of ADEX in September 2012.

Our gross profit percentage was 30% for the year ended December 31, 2012 compared to 34% for the year ended December 31, 2011.  The decrease was a result of the acquisitions we completed in 2012.  The gross margins on our telecommunications staffing services were only 21%, which decreased the overall margin. It is expected that as the telecommunications staffing services portion of our revenue increases, our overall gross margin percentage will continue to decline, while the gross margin dollars will increase.

General and Administrative.
 
   
Year ended December 31,
   
Change
 
   
2012
   
2011
   
Dollars
   
Percentage
 
General and administrative
 
$
3,788,015
   
$
1,251,102
   
$
2,536,913
     
203
%
Percentage of revenue
   
22
%
   
44
%
               

Our general and administrative expenses increased $2.5 million, from $1.3 million for the year ended December 31, 2011 to $3.8 million for the year ended December 31, 2012.  The increases were primarily as a result of increased overhead expenses resulting from the acquisitions we completed in the years ended December 31, 2011 and 2012.  General and administrative expenses decreased to 22% of revenue in the year ended December 31, 2012, from 44% in the year ended December 31, 2011. This decrease in percentage was a result of the increased revenue, which did not cause a corresponding increase in general and administrative expenses.

Salaries and Wages
 
   
Year ended December 31,
   
Change
 
   
2012
   
2011
   
Dollars
   
Percentage
 
Salaries and wages
 
$
3,802,158
   
$
5,053,600
   
$
(1,251,442
   
(25
)%
Percentage of revenue
   
22
%
   
180
%
               
 
Our salaries and wages decreased $1.2 million from $5.0 million for the year ended December 31, 2011 to $3.80 million for the year ended December 31, 2012.  The decreases were a result of a significant decrease in the amount of stock compensation issued in 2012, as compared to 2011.  Stock compensation decreased from $4.1 million in the year ended December 31, 2011 to $0.8 million in the year ended December 31, 2012.  The decrease in stock compensation was partially offset by an increase in the number of employees.
 
 
36

 

Changes in Fair Value of Derivative Liabilities.

The aggregate fair value of derivative liabilities as of December 31, 2012 and December 31, 2011 amounted to $33,593 and $38,557, respectively.

As a result of the change in the fair value of our derivative instruments, we recorded a gain of $198,908 and $421,340 in the years ended December 31, 2012 and 2011, respectively.

Net Gain on Deconsolidation of Digital Subsidiary

During 2012, we sold 60% of the outstanding shares of common stock of Digital.  We recognized a gain on deconsolidation of $528,000, based on the negative investment carrying amount.  We made additional investments in Digital of approximately $179,000 during 2012, at which time we wrote off the remaining balance of our investment in Digital. The result for the year was a net gain of $453,000 on the deconsolidation of Digital.

Interest Expense.
 
   
Year ended December 31,
   
Change
 
   
2012
   
2011
   
Dollars
   
Percentage
 
Interest expense
 
$
1,699,746
   
$
1,443,229
   
$
256,517
     
18
%
 
Interest expense increased $0.3 million from $1.4 million in the year ended December 31, 2011 to $1.7 million for the year ended December 31, 2012, primarily due to increases in our outstanding debt obligations.   Included in interest expense is the amortization of debt discount and deferred loan costs.  In the year ended December 31, 2012, amortization was $0.4 million compared to $1.1 million for the year ended December 31, 2011.  The decrease was a result of the debt extinguishments to our loan from UTA Capital LLC in 2011, together with additional costs associated with the issuance of the debt in 2011.

Net Loss Attributable to our Common Stockholders.

Net loss attributable to our common stockholders was $2.1 million for the year ended December 31, 2012, as compared to $6.4 million for the year ended December 31, 2011.

Going Concern

During the years ended December 31, 2012 and 2011, we suffered losses from operations that may raise doubt about our ability to continue as a going concern. As of December 31, 2012, we had negative working capital, a stockholders' deficit and continued losses.  Our management believes that actions presently being taken to obtain additional funding provide the opportunity for us to continue as a going concern.  However, there can be no assurance that additional financing that is necessary for us to continue our business will be available to us on acceptable terms, or at all.

Liquidity, Capital Resources and Cash Flows

We have satisfied our capital and liquidity needs primarily through private sales of equity securities and bank borrowings.  As of December 31, 2012, we had cash and cash equivalents of $646,978, which were exclusively denominated in U.S. dollars and consisted of bank deposits.  As of December 31, 2012, $14,250 of cash was held by foreign subsidiaries.  We believe these amounts can be repatriated without significant tax consequences.

We have incurred net losses attributable to our common stockholders of $2.1 million and $6.4 million during the years ended December 31, 2012 and 2011, respectively.  Our accumulated deficit as of December 31, 2012 was $12.5 million.

Indebtedness.

MidMarket Loan Agreement. On September 17, 2012, we entered into the MidMarket Loan Agreement, pursuant to which the lenders thereunder provided us with senior secured first-lien term loans in an aggregate principal amount of $13,000,000.  We used a portion of the proceeds of such loans to finance our recent acquisitions, to repay certain outstanding indebtedness and to pay related fees, costs and expenses.

On November 13, 2012, we entered into a first amendment to the MidMarket Loan Agreement, pursuant to which the lenders provided us with additional senior secured first-lien term loans in an aggregate principal amount of $2,000,000 and made certain other amendments to the MidMarket Loan Agreement.

As of December 31, 2012, we were in default under certain covenants of the MidMarket Loan Agreement.  On March 22, 2013, we entered into a second amendment, consent and waiver agreement, pursuant to which the lenders waived certain financial covenants and other defaults under the MidMarket Loan Agreement and made certain amendments to our covenants in the MidMarket Loan Agreement.  In addition, the lenders consented to our proposed acquisitions of certain businesses and to the financing thereof, subject to our satisfaction of conditions precedent.
 
 
37

 

The loans under the MidMarket Loan Agreement mature on September 17, 2017.  However, if we fail to raise at least $30,000,000 in connection with a public offering of our voting equity securities by March 17, 2014, such loans will mature on an accelerated basis and will come due on June 17, 2014.  We were required to repay up to $750,000 of such loans to the extent we did not complete an acquisition. Interest on the loans under the MidMarket Loan Agreement accrues at a rate per annum equal to 12.0%.

Subject to certain exceptions, all our obligations under the MidMarket Loan Agreement are unconditionally guaranteed by each of our existing direct and indirect domestic subsidiaries and are secured by a first priority security interest in substantially all of our assets and the assets of our subsidiaries, and by the capital stock of our subsidiaries, subject to certain customary exceptions.

In the MidMarket Loan Agreement, we made certain representations and warranties, affirmative covenants, negative covenants and financial covenants.  The MidMarket Loan Agreement also contains events of default, including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the loans, the failure to comply with the covenants and agreements specified in the MidMarket Loan Agreement and other loan documents entered into in connection therewith, the acceleration of certain other indebtedness resulting from the failure to pay principal on such other indebtedness, certain events of insolvency and the occurrence of any event, development or condition which has had or could reasonably be expected to have a material adverse effect.  If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then outstanding loans under the MidMarket Loan Agreement may become due and payable immediately.

Pursuant to the MidMarket Loan Agreement, we issued to the lenders warrants to purchase 749,542 shares of common stock at an initial exercise price of $1.25 per share, subject to adjustment as set forth in the warrants, on or before September 17, 2014, subject to extension if certain of our financial statements have not been delivered to the holders of such warrants in a timely manner showing that certain financial thresholds have been met.

Wellington Promissory Note. On September 17, 2012, we entered into a promissory note with Wellington Shields & Co. LLC (Wellington Note) as evidence of the fees we owed to Wellington for services rendered relating to the MidMarket Loan Agreement.  The Wellington Note is for a term of 35 days with interest in arrears from September 17, 2012 at the lowest applicable federal rate of interest. As of March 28, 2013, $95,000 principal plus accrued interest remained outstanding on the Wellington Note.  As of December 31, 2012, we were in default with respect to the Wellington Note.

Note and Warrant Purchase Agreement with UTA Capital LLC.  On August 6, 2010, we secured a working capital loan from UTA Capital LLC, with Digital as the borrower.  In connection with such loan, we issued to UTA Capital, LLC warrants initially to purchase 167,619 shares of our common stock with an exercise price of $18.75 per share.  The warrants were exchanged for 177,270 shares of common stock on August 29, 2012.  We paid off the remaining outstanding balance of this loan in September 2012.

Proceeds from Equity Issuances.

In the years ended December 31, 2012 and 2011, we raised net proceeds of $6.9 million and $0.07 million, respectively, through private sales of equity securities.

Working Capital.

At December 31, 2012, we had a working capital deficit of approximately $3.7 million, as compared to a working capital deficit of approximately $1.9 million at December 31, 2011.  The decrease in working capital of $1.8 million was primarily the result of our acquisitions of ADEX and T N S in September 2012, the deconsolidation of 60% of Digital, the repayment of debt and the raising of equity. 

Cash Flows

The following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements, which are included elsewhere in this report:
 
Summary of Cash Flows
           
   
Year ended December 31,
 
   
2012
   
2011
 
Net cash (used in) operations
 
$
(3,155,003
 
$
(1,068,532
Net cash used in investing activities
   
(13,556,332
   
(120,474
)
Net cash provided by financing activities
   
17,269,028
     
1,255,815
 
 
 
38

 
 
Cash flows (used in) operating activities.  We have historically experienced cash deficits from operations as we continued to expand our business and sought to establish economies of scale.  Our largest uses of cash for operating activities are for general and administrative expenses.  Our primary source of cash flow from operating activities is cash receipts from customers.  Our cash flow from operations will continue to be affected principally by the extent to which we grow our revenues and increase our headcount.

Net cash used in operating activities for the year ended December 31, 2012 of $3.2 million was primarily attributable to a net loss of $2.1 million excluding non-cash charges and an increase in accounts receivable of $2.3 million primarily due to revenue growth for the year ended December 31, 2012, which was offset in part by an increase in accounts payable and accrued expenses of $1.7 million.

Net cash used in operating activities for the year ended December 31, 2011 of $1.1 million was primarily attributable to a net loss of $6.4 million excluding non-cash charges and an increase in accounts receivable of $66,866 primarily due to the revenue growth for the year ended December 31, 2011, which was offset in part by an increase in accounts payable and accrued expenses of $342,535.

Net cash used in investing activities.  Net cash used in investing activities for the years ended December 31, 2012 and 2011 was $13.6 million and $120,474, respectively, consisting primarily of purchases of capital equipment in 2011 and cash used for acquisitions in 2012.

Net cash provided by financing activities.  Net cash provided by financing activities for the years ended December 31, 2012 was $17.3 million, which resulted primarily from the proceeds from the loans under the MidMarket Loan Agreement and the sale of preferred shares.  Net cash provided by financing activities for the year ended December 31, 2011 was $1.3 million, which resulted primarily from the loans from Tekmark and MMD Genesis.

Rental Obligations.

In July 2010, we entered into an operating lease covering our primary office facility in Boca Raton, Florida that has an original non-cancelable term of five years with a provision for early termination after three years.  The lease contains renewal provisions and generally requires us to pay insurance, maintenance and other operating expenses. Our operating subsidiaries also have real property leases as described in Item 2. “Properties.”

The future minimum obligation during each year through 2016 under the leases with non-cancelable terms in excess of one year is as follows:
 
Years Ended December 31,
 
Future Minimum
Lease Payments
 
2013
 
$
197,397
 
2014
   
133,214
 
2015
   
121,655
 
2016
   
66,000
 
Total
 
$
518,266
 
 
Capital expenditures

We had capital expenditures of $89,258 and $81,144 for the years ended December 31, 2012 and 2011, respectively.  We expect our capital expenditures for the year ending December 31, 2013 to be approximately $100,000.  These capital expenditures will be primarily utilized for equipment needed to generate revenue and for office equipment.  We expect to fund such capital expenditures out of our working capital

We also require approximately $17.5 million and $18.2 million over the next 90 days to pay the cash portion of the purchase prices of each of Telco and IPC, respectively.  We expect to obtain such funds through the sale of equity securities and expect to consummate the acquisition of such companies concurrently with the consummation of the sale of such equity securities.  There can be no assurance, however, that we will be able to consummate the sale of our equity securities on terms that are acceptable to us, or at all.

Off-balance sheet arrangements

During the years ended December 31, 2012 and 2011, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
 
39

 

Contingencies

We are involved in claims and legal proceedings arising from the ordinary course of our business.  We record a provision for a liability when we believe that it is both probable that a liability has been incurred, and the amount can be reasonably estimated.  If these estimates and assumptions change or prove to be incorrect, it could have a material impact on our financial statements.

Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations are based on our historical and pro forma consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported therein and accompanying notes.  On an ongoing basis, we evaluate these estimates and assumptions, including those related to recognition of revenue for costs and estimated earnings in excess of billings, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, income taxes, accrued insurance claims, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense for performance-based stock awards and accruals for contingencies, including legal matters.  These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and as a result, actual results could differ materially from these estimates.

We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve making significant judgments and estimates that are used in the preparation of our historical and pro forma consolidated financial statements.  The impact of these policies affects our reported and expected financial results and are discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  We have discussed the development, selection and application of our critical accounting policies with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also important to understanding our historical and pro forma consolidated financial statements.  The notes to our consolidated financial statements in this report contain additional information related to our accounting policies, including the critical accounting policies described herein, and should be read in conjunction with this discussion.

Emerging Growth Company.

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.  As an “emerging growth company,” we may delay adoption of new or revised accounting standards applicable to public companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards.  We have elected not to take advantage of the benefits of this extended transition period.  As a result, our financial statements will be comparable to those of companies that comply with such new or revised accounting standards.  Upon issuance of new or revised accounting standards that apply to our financial statements, we will disclose the date on which we will adopt the recently-issued accounting guidelines.

Revenue Recognition.

We recognize revenue on arrangements in accordance with ASC Topic 605-10-S99, Revenue Recognition-Overall-SEC Materials.  Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.

Our revenues related to specialty contracting services are generated from contracted services to design, installation and repair services of structured data and voice cabling systems to small and mid-sized commercial and governmental entities.  Prior to commencement of services and depending on the length of the services to be provided, we secure the client’s acceptance of a written proposal.  Generally, the services are provided over a period ranging between two to 14 days.  If we anticipate that the services will span over a month, we usually require a down payment from the customer, which help pay for the cabling and accessories and we will provide monthly progress billing, based on services rendered, or upon completion of the contracted services.

Our revenues related to telecommunications staffing services are generated from contracted services to provide technical engineering and management solutions to large voice and data communications providers, as specified by the clients.  The contracts provide payment to us for our services may be based on either (i) direct labor hours at fixed hourly rates or (ii) fixed-price contracts. Our services provided under the contracts are generally provided within a month.  Occasionally, the services may be provided over a period of up to four months.  If we anticipate that the services span over a month and depending on the contract terms, we provide either progress billing at least once a month or upon completion of the clients’ specifications.  We recognize revenues of contracts based on direct labor hours and fixed-price contracts that do not overlap a calendar month based on services provided.
 
 
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Allowances for Doubtful Accounts.

We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. Management analyzes the collectability of accounts receivable balances each period.  This analysis considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors.  Should any of these factors change, the estimate made by management may also change, which could affect the level of our future provision for doubtful accounts.  We recognize an increase in the allowance for doubtful accounts when it is probable that a receivable is not collectable and the loss can be reasonably estimated. Any increase in the allowance account has a corresponding negative effect on our results of operations.  We believe that none of our significant customers were experiencing financial difficulties that would materially impact our trade accounts receivable or allowance for doubtful accounts as of December 31, 2012.

Goodwill and Intangible Assets.

As of December 31, 2012 and 2011, we had goodwill in the amount of $20,561,980 and $343,986, respectively.  We did not recognize any goodwill impairment during the years ended December 31, 2012 or 2011.

We account for goodwill in accordance with Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles-Goodwill and Other  (ASC Topic 350).  Our reporting units and related indefinite-lived intangible assets are tested annually during the fourth fiscal quarter of each year in accordance with ASC Topic 350 in order to determine whether their carrying value exceeds their fair value.  In addition, they are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value.  If we determine the fair value of goodwill or other indefinite-lived intangible assets is less than their carrying value as a result of the tests, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.

In accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets, we review finite-lived intangible assets for impairment whenever an event occurs or circumstances change which indicates that the carrying amount of such assets may not be fully recoverable.  Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value.  If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred.  Impairment losses, if any, are reflected in operating income or loss in the consolidated statements of operations during the period incurred.

We use judgment in assessing if goodwill and intangible assets are impaired.  Estimates of fair value are based on our projection of revenues, operating costs, and cash flows taking into consideration historical and anticipated future results, general economic and market conditions, as well as the impact of planned business or operational strategies.  To measure fair value, we employ a combination of present value techniques which reflect market factors.  Changes in our judgments and projections could result in significantly different estimates of fair value potentially resulting in additional impairments of goodwill and other intangible assets.

Our goodwill resides in multiple reporting units that are aggregated for our goodwill impairment testing.  The profitability of individual reporting units may suffer periodically from downturns in customer demand and other factors resulting from the cyclical nature of our business, the high level of competition existing within our industry, the concentration of our revenues from a limited number of customers, and the level of overall economic activity.  During times of slowing economic conditions, our customers may reduce capital expenditures and defer or cancel pending projects.  Individual reporting units may be relatively more impacted by these factors than us as a whole. As a result, demand for the services of one or more of our reporting units could decline resulting in an impairment of goodwill or intangible assets.

We performed our annual impairment test in the fourth quarter of each of years ended December 31, 2012 and 2011.  The key valuation assumptions contributing to the fair value estimates of our reporting units were (a) a discount rate based on our best estimate of the weighted average cost of capital adjusted for risks associated with the reporting units; (b) terminal value based on terminal growth rates; and (c) seven expected years of cash flow before the terminal value for each annual test.

The discount rate reflects risks inherent within each reporting unit operating individually, which is greater than the risks inherent in us as a whole.  The discount rate used in the analysis for the year ended December 31, 2012 decreased compared to the rate used in the year ended December 31, 2011 analysis as a result of reduced risk relative to industry conditions.  We believe the assumptions used in the impairment analysis each year are reflective of the risks inherent in the business models of our reporting units and within our industry.
 
 
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For years ended December 31, 2012 and 2011, none of the reporting units incurred operating losses that would impact our financial position in a material manner.  Current operating results, including any losses, are evaluated by us in the assessment of goodwill and other intangible assets. The Company's reporting units are aggregated for goodwill impairment testing. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties.  Changes in judgments and estimates could result in a significantly different estimate of the fair value of the reporting units and could result in impairments of goodwill or intangible assets at additional reporting units.  Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units.  We can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible assets in future periods.

Certain of our business units also have other intangible assets, including customer relationships, trade names and non-compete agreements.  As of December 31, 2012, we believed the carrying amounts of these intangible assets were recoverable.  However, if adverse events were to occur or circumstances were to change indicating that the carrying amount of such assets may not be fully recoverable, the assets would be reviewed for impairment and the assets could be impaired.

Stock-Based Compensation.

Our stock-based award programs are intended to attract, retain and reward employees, officers, directors and consultants, and to align stockholder and employee interests.  We have granted stock-based awards to individuals.  Our policy going forward will be to issue awards under our recently-adopted 2012 Employee Incentive Plan and Employee Stock Purchase Plan.

Compensation expense for stock-based awards is based on the fair value at the measurement date and is included in operating expenses.  The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions including: expected volatility based on the historical price of our stock over the expected life of the option, the risk-free rate of return based on the United States treasury yield curve in effect at the time of the grant for the expected term of the option, the expected life based on the period of time the options are expected to be outstanding using historical data to estimate option exercise and employee termination; and dividend yield based on history and expectation of dividend payments. Stock options generally vest ratably over a three-year period and are exercisable over a period up to ten years.

The fair value of restricted stock is estimated on the date of grant and is generally equal to the closing stock price on that date.  The total amount of stock-based compensation expense ultimately is based on the number of awards that actually vest and fluctuates as a result of performance criteria, as well as the vesting period of all stock based awards.  Accordingly, the amount of compensation expense recognized during any fiscal year may not be representative of future stock-based compensation expense.  In accordance with ASC Topic 718,  Compensation – Stock Compensation  (ASC Topic 718), compensation costs for performance-based awards are recognized over the requisite service period if it is probable that the performance goal will be satisfied.  We use our best judgment to determine probability of achieving the performance goals in each reporting period and recognize compensation costs based on the number of shares that are expected to vest.

Income Taxes.

We account for income taxes under the asset and liability method.  This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. ASC Topic 740,  Income Taxes  (ASC Topic 740), prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return.  The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on derecognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition.  Under ASC Topic 740, companies may recognize a previously-unrecognized tax benefit if the tax position is effectively (rather than “ultimately”) settled through examination, negotiation or litigation.

Contingencies and Litigation.

In the ordinary course of our business, we are involved in certain legal proceedings. ASC Topic 450, Contingencies (ASC Topic 450), requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.  If only a range of probable loss can be determined, we accrue for our best estimate within the range for the contingency. In those cases where none of the estimates within the range is better than another, we accrue for the amount representing the low end of the range in accordance with ASC Topic 450. As additional information becomes available, we reassess the potential liability related to our pending contingencies and litigation and revise our estimates.  Revisions of our estimates of the potential liability could materially impact our results of operations.  Additionally, if the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to earnings when determined.
 
 
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Distinguishing of Liabilities From Equity.

We rely on the guidance provided by ASC 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments, such as our preferred stock.  We first determine whether the particular financial instrument should be classified as a liability.  We will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that we must or may settle by issuing a variable number of our equity shares.

Once we determine that the financial instrument should not be classified as a liability, we determine whether the financial instrument should be presented under the liability section or the equity section of the balance sheet (“temporary equity”).  We will determine temporary equity classification if the redemption of the preferred stock or other financial instrument is outside our control (i.e. at the option of the holder).  Otherwise, we account for the financial instrument as permanent equity.

Initial Measurement.

We record our financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

Subsequent Measurement.

We record the fair value of our financial instruments classified as liability at each subsequent measurement date. The changes in fair value of our financial instruments classified as liabilities are recorded as other expense/income.

Temporary equity

At each balance sheet date, we re-evaluate the classification of our redeemable instruments, as well as the probability of redemption. If the redemption amount is probable or the instrument is currently redeemable, we record the instrument at its redemption value. Upon issuance, the initial carrying amount of a redeemable equity security is its fair value. If the instrument is redeemable currently at the option of the holder, it will be adjusted to its maximum redemption amount at each balance sheet date. If the instrument is not redeemable currently and it is not probable that it will become redeemable, it is recorded at its fair value. If it is probable the instrument will become redeemable, it will be recognized immediately at its redemption value. The resulting increases or decreases in the carrying amount of a redeemable instrument will be recognized as adjustments to additional paid-in capital.

Business combinations

We account for our business combinations under the provisions of ASC 805-10, Business Combinations (ASC 805-10), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values.  ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.  Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.  If the business combination provides for contingent consideration, we record the contingent consideration at fair value at the acquisition date and any changes in fair value after the acquisition date are accounted for as measurement-period adjustments if they pertain to additional information about facts and circumstances that existed at the acquisition date and that we obtained during the measurement period.  Changes in fair value of contingent consideration resulting from events after the acquisition date, such as earn-outs, are recognized as follows: 1) if the contingent consideration is classified as equity, the contingent consideration is not re-measured and its subsequent settlement is accounted for within equity, or 2) if the contingent consideration is classified as an asset or a liability, the changes in fair value are recognized in earnings.
 
 
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ITEM 7A.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Smaller reporting companies are not required to provide the information required by this item.

ITEM 8.  
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the two years in the years ended December 31, 2012 and 2011, together with the related notes and the reports of our independent registered public accounting firms, are set forth on pages F-1 to F-51 of this report.

ITEM 9.  
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On January 17, 2013, our board of directors approved the dismissal of Sherb & Co., LLP (“Sherb”) as our independent auditor, effective immediately. Sherb’s reports on our financial statements as of and for the fiscal years ended December 31, 2011 and 2010 contained a qualification that due to our losses from operations and accumulated deficits, there was substantial uncertainty about our ability to continue as a going concern.  Other than such qualification, Sherb’s reports on our financial statements as of and for the fiscal years ended December 31, 2011 and 2010 did not contain any other adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended December 31, 2011 and 2010 and through Sherb’s dismissal on January 17, 2013, there were (1) no disagreements with Sherb on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Sherb, would have caused Sherb to make reference to the subject matter of the disagreements in connection with its reports, and (2) no events of the type listed in paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-K.

Concurrent with the decision to dismiss Sherb as our independent registered public accounting firm, our board of directors appointed BDO USA, LLP (“BDO”) as our independent registered public accounting firm. During the years ended December 31, 2011 and 2010 and through the date of BDO’s appointment, neither we nor anyone acting on our behalf consulted BDO with respect to (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us or oral advice was provided that BDO concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or reportable events set forth in Item 304(a)(1)(iv) and (v), respectively, of Regulation S-K.

ITEM  9A.  
CONTROLS AND PROCEDURES
 
Management's Report on Internal Control over Financial Reporting

Evaluation of Disclosure Controls and Procedures.  

We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met.  Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.  The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer  have concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure as a result of material weaknesses in our disclosure controls and procedures.  The material weaknesses relate to our inability to timely file our reports and other information with the SEC as required under Section 13 of the Securities Exchange Act of 1934, together with the material weaknesses in our internal control over financial reporting as described later in this section.  To remediate the material weaknesses in disclosure controls and procedures related to our inability to timely file reports and other information with the SEC, we plan to hire additional experienced accounting and other  personnel to assist with filings and financial record keeping.
 
 
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Management’s Report on Internal Control over Financial Reporting.  

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that:

 
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls.  Based on this assessment, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2012, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of the material weaknesses identified in our disclosure controls and procedures as described earlier in this section as well as weaknesses in our internal control over financial reporting.  Such material weaknesses related to (i) the ability to prepare and timely issue the required filings with the Securities and Exchange Commission, (ii) our company lacking the appropriate technical resources to properly evaluate transactions in accordance with generally accepted accounting principles and, (iii) our company lacking a review function. We have taken steps, including the hiring of a Chief Financial Officer, and implementing an improved segregation of duties and plan to continue to take additional steps, to seek to remediate these material weaknesses for the year ending December 31, 2013 and to improve our financial reporting systems and implement new policies, procedures and controls.  We believe that these remedial actions will be sufficient to correct the material weaknesses in internal control over financial reporting which existed at December 31, 2012.
 
Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.     OTHER INFORMATION
 
None. 
 
 
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PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

General

The following sets forth information about our executive officers and directors as of March 28, 2013.
 
 Name
 
Position
 
Age
 
           
Mark Munro
 
Chairman of the Board, Chief Executive Officer
 
50
 
Mark F. Durfee
 
Director
 
56
 
Charles K. Miller
 
Director
 
52
 
Neal L. Oristano
 
Director
 
57
 
Daniel J. Sullivan
 
Chief Financial Officer
 
55
 
Lawrence M. Sands
 
Senior Vice President, Corporate Secretary
 
53
 
Roger M. Ponder
 
Chief Operating Officer
 
60
 
 
The following is information about the experience and attributes of the members of our board of directors and senior executive officers as of the date of this report.  The experience and attributes of our directors discussed below provide the reasons that these individuals were selected for board membership, as well as why they continue to serve in such positions.

Mark Munro, Chief Executive Officer and Chairman of the Board.  Mr. Munro has served as our Chief Executive Officer and as the Chairman of our Board since December 2011.  Mr. Munro is also the Founder and has been President of Munro Capital Inc., a private equity investment firm, since 2005.  Mr. Munro has been the Chief Executive Officer and owner of 1112 Third Ave Corp., a real estate holding company, since October 2000.  He has also been an investor in private companies for the last seven years, including Vaultlogix, LLC, a provider of online data backup solutions for business data.  Prior to forming Munro Capital, Mr. Munro founded, built and sold Eastern Telcom Inc., a telecommunication company, from 1990 to 1996.  Mr. Munro has been directly involved in over $150 million of private and public transactions as both an investor and entrepreneur.  Mr. Munro has been a board member of Environmental Remediation and Financial Services since 2004 and sat on the board of Vaultlogix, LLC from March 2004 to February 2008.  Mr. Munro also has experience as a former Chairman of the Board of BiznessOnline.com Inc., a NASDAQ-listed internet access, web design and e-commerce hosting company, from May 1999 to August 2002.  Mr. Munro received his B.A. in economics from Connecticut College.  Mr. Munro brings extensive business experience, including years as a successful entrepreneur and investor, to our board of directors and executive management team.

Mark F. Durfee, Director.  Mr. Durfee has been a member of our board of directors since December 2012.  Mr. Durfee has been a principal at Auerbach Acquisition Associates II, Inc., a private equity fund, since August 2007.  Mr. Durfee also worked for Kinderhook Capital Management, LLC, an investment manager, as a partner from January 1999 to December 200, at which he was responsible for investing in over 40 middle market companies.  He has been a director of Home Sweet Home Holdings, Inc., a wholesaler of home furnishings, since January 2012.  Mr. Durfee received his B.S. from the University of Wyoming in finance. Mr. Durfee brings over 25 years of experience as a private equity investor to our board of directors.

Charles K. Miller, Director.  Mr. Miller has been a member of our board of directors since November 2012.  He has been the Chief Financial Officer of Tekmark Global Solutions, LLC, a provider of information technology, communications and consulting services, since September 1997.  Mr. Miller received his B.S. in accounting and his M.B.A. from Rider University and is a Certified Public Accountant in New Jersey.  Mr. Miller brings over 30 years’ of financial experience to our board of directors.

Neal L. Oristano, Director.  Mr. Oristano has been a member of our board of directors since December 2012.  Mr. Oristano has been the Vice President - Service Provider Sales Segment at Cisco Systems Inc., an internet protocol-based networking and products company, since August 2011.  Prior to that, he was the Senior Vice President - Service Provider Sales at Juniper Networks, Inc., a networking software and systems company, from July 2004 to July 2011.  Mr. Oristano received his B.S. from St. Johns University in marketing.  Mr. Oristano brings 33 years of technology experience, including enterprise and service provider leadership, to our board of directors.

Daniel J. Sullivan, Chief Financial Officer.  Mr. Sullivan has served as our Chief Financial Officer since December 2011 and as a member of our board of directors from 2011 to November 2012.  Mr. Sullivan has been the Chief Financial Officer for Munro Capital Inc., a diversified finance company, since August 2010.  Prior to that, he served as Chief Financial Officer for Vaultlogix LLC, an Internet vaulting company, from January 2003 to July 2010.  Mr. Sullivan received his B.S. in accounting from the University of Massachusetts and his M.B.A. from Southern New Hampshire University (formerly New Hampshire College).  Mr. Sullivan brings extensive experience in finance for both publicly-traded and private companies to our executive management team.
 
 
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Lawrence M. Sands, Senior Vice President and Corporate Secretary.  Mr. Sands has served as our Senior Vice President since January 2010 and was appointed our Corporate Secretary in August 2010.  From January 2009 to September 2010, Mr. Sands was a finance manager at Vista BMW, an automobile retailer located in Coconut Creek, Florida.  From March 2010 until September 2010, he was Vice President, Secretary and a director of Omni Ventures, Inc., a development-stage company that planned to provide equity funding for commercial and recreational projects in the Mid-west and Western areas of the United States.  From June 2008 to January 2010, Mr. Sands provided strategic merger and acquisition consulting services to Digital Comm, Inc., a provider of turnkey services and solutions to the communications industry that we acquired in January 2010.  From January 2008 until December 2008, he was Chief Executive Officer of Paivis Corp., a public company engaged in long distance telecommunications.  From September 2003 until April 2008, Mr. Sands was a finance manager at JM Lexus, an automobile retailer located in Margate, Florida.  Mr. Sands received a B.S. in technology and industrial arts from New York University and a J.D. from Whittier College, School of Law. Mr. Sands brings business and finance experience to our executive management team.  Mr. Sands filed a personal bankruptcy petition in 2004 that was discharged in 2005.

Roger M. Ponder, Chief Operating Officer.  Mr. Ponder has served as our Chief Operating Officer since November 2012. Mr. Ponder has been the President and Chief Executive Officer of Summit Broadband LLC, a provider of consulting services to private equity and institutional banking entities in the telecommunications, cable and media/internet sectors, since August 2009.  From January 2005 to August 2009, he was the President - Midwest/Kansas City Division of Time Warner Cable.  Mr. Ponder was a member of the United Way Board of Trustees’ - Kansas City from January 2006 to January 2011.  Mr. Ponder received his B.S. from Rollins College in Business Administration and Economics. Mr. Ponder brings extensive business development, strategic planning and operational experience to our executive management team.

Family Relationships

There are no family relationships among any of our directors or executive officers.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file reports of ownership of, and transactions in, our equity securities with the SEC. Such executive officers, directors and 10% shareholders also are required to furnish us with copies of all Section 16(a) reports they file.
 
 
Based on a review of the copies of such reports and the written representations of such reporting persons, we believe that all Section 16(a) filing requirements applicable to our executive officers, directors and 10% shareholders were complied with during 2012, with the exception of former officers and directors Gideon Taylor and Billy Caudill, who each inadvertently failed to file Form 3, Initial Statement of Beneficial Ownership of Securities. However, we are advised that these individuals neither sold nor purchased any shares during the reporting period.

Code of Ethics

We have adopted a Financial Code of Ethics applicable to our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial and accounting officer.  We also have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors.  We will provide a copy of our Financial Code of Ethics or our Code of Business Conduct and Ethics, without charge, to any person desiring a copy, by written request to our company at 2500 N. Military Trail, Suite 275, Boca Raton, Florida 33431.

Changes in Stockholder Procedures to Recommend Director Nominees

On November 16, 2012, our board of directors approved new amended and restated bylaws for our company (the “Amended Bylaws”).   The Amended Bylaws substantially revised our prior bylaws, including the addition of an advance notice bylaw setting forth the requirements for stockholders to propose matters to be considered at a meeting of stockholders (including the nomination of candidates for election to our board of directors).

Pursuant to the Amended Bylaws, nominations of persons for election to our board of directors at an annual meeting or at a special meeting (but only if our board of directors has first determined that directors are to be elected at such special meeting) may be made at such meeting (i) by or at the direction of our board of directors, including by any committee or persons appointed by the board of directors, or (ii) by any stockholder who (A) was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such nomination is proposed to be made, only if such beneficial owner was the beneficial owner of our shares) both at the time of giving the required notice (as discussed below) and at the time of the meeting, (B) is entitled to vote at the meeting, and (C) complied with the notice procedures as to such nomination as described below.
 
 
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For nominations to be made at an annual meeting by a stockholder, the stockholder must (i) provide a “timely” notice (as described below) thereof in writing and in “proper form” (as described below) to our Secretary and (ii) provide any updates or supplements to such timely notice at the times and in the forms as described below. Without qualification, if our board of directors has first determined that directors are to be elected at such special meeting, then for nominations to be made at a special meeting by a stockholder, the stockholder must (i) provide timely notice thereof in writing and in proper form to our at our principal executive offices and (ii) provide any updates or supplements to such notice at the times and in the forms described below. In no event shall any adjournment or postponement of an annual meeting or special meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described below.

To be “timely” with respect to an annual meeting of stockholders, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the ninetieth 90th day prior to such annual meeting or, if the first public disclosure of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the close of business on the tenth day following the day on which public disclosure of the date of such annual meeting was made

To be “timely” with respect to a special meeting, a stockholder’s notice for nominations to be made at a special meeting by a stockholder must be delivered to or mailed and received at our principal executive offices not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the 90th day prior to such special meeting or, if the first public disclosure of the date of such special meeting is less than 100 days prior to the date of such special meeting, the tenth day following the day on which public disclosure of the date of such special meeting was first made.

To be in a “proper form”, a stockholder’s notice to our Secretary is required to set forth:

(i)           As to the stockholder providing the notice and each other Proposing Person (as defined below), (A) the name and address of the stockholder providing the notice and of the other Proposing Persons, and (B) any Disclosable Interests (as defined in the Amended Bylaws) of the stockholder providing the notice (or, if different, the beneficial owner on whose behalf such notice is given) and/or each other Proposing Person;

(ii)           As to each person whom the stockholder proposes to nominate for election as a director, (A) all information with respect to such proposed nominee that would be required by the Amended Bylaws to be set forth in a stockholder’s notice if such proposed nominee were a Proposing Person, (B) all information relating to such proposed nominee that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 under the Exchange Act and the rules and regulations thereunder (including such proposed nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) and (C) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the stockholder providing the notice (or, if different, the beneficial owner on whose behalf such notice is given) and/or any Proposing Person, on the one hand, and each proposed nominee, his or her respective affiliates and associates and any other persons with whom such proposed nominee (or any of his or her respective affiliates and associates) is Acting in Concert (as defined in the Amended Bylaws), on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if such stockholder or beneficial owner, as applicable, and/or such Proposing Person were the “registrant” for purposes of such rule and the proposed nominee were a director or executive officer of such registrant; and

(iii)           We may require any proposed nominee to furnish such other information (including one or more accurately completed and executed questionnaires and executed and delivered agreements) as may reasonably be required by us to determine the eligibility of such proposed nominee to serve as an independent director of our company or that could be material to a reasonable stockholder’s understanding of the independence or lack of independence of such proposed nominee.
 
For purposes of the Amended Bylaws, the term “Proposing Person” means: (i) the stockholder providing the notice of the nomination proposed to be made at the meeting, (ii) the beneficial owner, if different, on whose behalf the nomination proposed to be made at the meeting is made, (iii) any affiliate or associate of such beneficial owner (as such terms are defined in Rule 12b-2 under the Exchange Act) and (iv) any other person with whom such stockholder or such beneficial owner (or any of their respective affiliates or associates) is Acting in Concert.

A stockholder providing notice of any nomination proposed to be made at a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and, if different, as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to or mailed and received by our Secretary at our principal executive offices not later than five business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight business days prior to the date for the meeting or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof).
 
 
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The chairman of our board of directors or any other officer presiding at the meeting shall have the power, if the facts warrant, to determine that a nomination was not properly made in accordance with the Amended Bylaws, and if he or she should so determine, he or she shall so declare such determination to the meeting and the defective nomination shall be disregarded.

In addition to the requirements described herein with respect to any nomination proposed to be made at a meeting, each Proposing Person shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to any such nominations.

Audit Committee

As of the date of this report, we do not have a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, or a committee performing similar functions.  Even though we do not presently have a separately-designated audit committee, we have determined that Mr. Charles Miller qualifies as an audit committee financial expert, and have determined that Mr. Miller is an independent director as defined in the Nasdaq corporate governance rules.

ITEM 11.      EXECUTIVE COMPENSATION

This section describes the material elements of compensation awarded to, earned by or paid to Mark Munro, our Chief Executive Officer, Billy B. Caudill, our former President, Lawrence M. Sands, our Senior Vice President and Corporate Secretary, and Daniel J. Sullivan, our Chief Financial Officer.  These individuals are referred to as the “named executive officers” in this report.  The following table provides a summary of compensation paid for the years ended December 31, 2012 and 2011 to the named executive officers:

Summary Compensation Table
 
Name and Principal Position
 
Fiscal
Year
 
Base Salary
($)
   
Bonus
($)
   
Stock
Awards
($)(1)
   
Option
Awards
($)
   
Non-Equity Incentive Plan Compensation
($)
   
All
Other
Compensation
($)
   
Total
($)
 
Mark Munro
Chief Executive Officer(2)
 
2012
2011
   
     
     
     
     
     
     
 
Billy B. Caudill
Former President(3)
 
2012
2011
   
$16,000
200,000
     
     
$400,000
800,000
(1)
   
     
     
     
$416,000
1,000,000
 
Lawrence M. Sands
Senior Vice President and Corporate Secretary(4)
 
2012
2011
   
120,000
120,000
     
     
400,000
(1)
   
     
     
$12,000
12,000
     
132,000
532,000
 
Daniel J. Sullivan
Chief Financial Officer
 
2012
2011
   
85,000
     
     
     
     
     
     
85,000
 
 
________________
 
(1)
Reflects the grant date fair value of awards of our Series A Preferred Stock in November 2011 to each of Messrs. Caudill and Sands.
 
(2)
Mr. Munro was appointed our Chief Executive Officer effective December 30, 2011.
 
(3)
Mr. Caudill commenced employment with us in January 2010 and was appointed our President in December 2011.  His employment with us terminated in September 2012.  Mr. Caudill was not paid any severance when he terminated his employment with our company.   No additional compensation is owed.  Mr. Caudill’s annual salary for fiscal 2011 totaled $200,000, which was paid in the form of approximately $30,000 in cash and the remainder in fully-vested shares of our Series D Preferred Stock.
 
(4)
The amount reflected in the “All Other Compensation” column for Mr. Sands represents his car allowance for 2012 and 2011.

Narrative Disclosure to Summary Compensation Table

Employment and Severance Agreements

In January 2010, we entered into a three-year employment agreement with Mr. Sands to serve as our Vice President.  Unless earlier terminated, at the end of the initial term, the agreement automatically renews for additional one-year terms until cancelled.  Under the terms of the agreement, Mr. Sands is entitled to annual base compensation of $120,000 payable in cash; however, if we do not have sufficient cash flow to pay the cash compensation, he is entitled to receive equity in lieu of the cash.  He also is entitled to receive a bonus at the discretion of our board of directors, a $1,000-per-month car allowance, to participate in any equity incentive plan we may adopt and to participate in employee benefits.  As an incentive to commence employment with us, we issued to Mr. Sands 32,000 shares of our common stock.
 
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In January 2010, we entered into a five-year employment agreement with Mr. Caudill to serve as our Chief Operating Officer.  Under the terms of the agreement, Mr. Caudill was entitled to annual compensation of $200,000 payable in cash; however, if we did not have sufficient cash flow to pay the cash compensation, he was entitled to receive equity in lieu of the cash.  He was also entitled to receive an annual bonus equal to five percent of our EBITDA for the applicable fiscal year, such bonus to be paid in cash or stock at the discretion of our board of directors, and a $1,000-per-month car allowance.  As an incentive to commence employment with us, we issued to Mr. Caudill 200,000 shares of our common stock. As noted above, Mr. Caudill’s employment with us terminated in September 2012.

Under each of these employment agreements, the executive would be entitled to severance if his employment is terminated by us without cause (as defined in the agreement) or by the executive following a material and substantial reduction in his authorities and responsibilities (and such resignation is approved by our board).  The severance amount would be three months base salary if the termination occurred in the first year after the executive’s date of hire, one year of base salary (or six months of base salary in the case of Mr. Sands) if the termination occurred in the second year after the executive’s date of hire, and two years of base salary (or one year of base salary in the case of Mr. Sands) if the termination occurred more than two years after the executive’s date of hire.

We do not maintain any retirement plans, tax-qualified or nonqualified, for our executives or other employees.

Outstanding Equity Awards at Fiscal Year-End

We do not have any outstanding restricted stock or stock option awards held by our named executive officers.

Equity Incentive Plans

2012 Performance Incentive Plan. On November 16, 2012, we adopted our 2012 Performance Incentive Plan, or the 2012 Plan, to provide an additional means to attract, motivate, retain and reward selected employees and other eligible persons.  Our stockholders approved the plan on or about November 22, 2012.  Employees, officers, directors and consultants that provide services to us or one of our subsidiaries may be selected to receive awards under the 2012 Plan.

Our board of directors, or one or more committees appointed by our board or another committee (within delegated authority), administers the 2012 Plan.  The administrator of the 2012 Plan has broad authority to:
 
 
select participants and determine the types of awards that they are to receive;
 
 
determine the number of shares that are to be subject to awards and the terms and conditions of awards, including the price (if any) to be paid for the shares or the award and establish the vesting conditions (if applicable) of such shares or awards;
 
 
cancel, modify or waive our rights with respect to, or modify, discontinue, suspend or terminate any or all outstanding awards, subject to any required consents;
 
 
construe and interpret the terms of the 2012 Plan and any agreements relating to the Plan;
 
 
accelerate or extend the vesting or exercisability or extend the term of any or all outstanding awards subject to any required consent;
 
 
subject to the other provisions of the 2012 Plan, make certain adjustments to an outstanding award and authorize the termination, conversion, substitution or succession of an award; and
 
 
allow the purchase price of an award or shares of our common stock to be paid in the form of cash, check or electronic funds transfer, by the delivery of previously-owned shares of our common stock or by a reduction of the number of shares deliverable pursuant to the award, by services rendered by the recipient of the award, by notice and third party payment or cashless exercise on such terms as the administrator may authorize or any other form permitted by law.

A total of 2,000,000 shares of our common stock is authorized for issuance with respect to awards granted under the 2012 Plan.  The share limit will automatically increase on the first trading day in January of each year (commencing with January 2014) by an amount equal to lesser of (i) 4% of the total number of outstanding shares of our common stock on the last trading day in December in the prior year, (ii) 2,000,000 shares, or (iii) such lesser number as determined by our board of directors.  Any shares subject to awards that are not paid, delivered or exercised before they expire or are canceled or terminated, or fail to vest, as well as shares used to pay the purchase or exercise price of awards or related tax withholding obligations, will become available for other award grants under the 2012 Plan.  As of the date of this report, no awards have been granted under the 2012 Plan, and the full number of shares authorized under the 2012 Plan is available for award purposes.
 
 
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Awards under the 2012 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards.  The administrator may also grant awards under the plan that are intended to be performance-based awards within the meaning of Section 162(m) of the U.S. Internal Revenue Code.  Awards under the plan generally will not be transferable other than by will or the laws of descent and distribution, except that the plan administrator may authorize certain transfers.

Nonqualified and incentive stock options may not be granted at prices below the fair market value of the common stock on the date of grant.  Incentive stock options must have an exercise price that is at least equal to the fair market value of our common stock, or 110% of fair market value of our common stock in the case of incentive stock option grants to any 10% owner of our common stock, on the date of grant.  These and other awards may also be issued solely or in part for services.  Awards are generally paid in cash or shares of our common stock. The plan administrator may provide for the deferred payment of awards and may determine the terms applicable to deferrals.

As is customary in incentive plans of this nature, the number and type of shares available under the 2012 Plan and any outstanding awards, as well as the exercise or purchase prices of awards, will be subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends or other similar events that change the number or kind of shares outstanding, and extraordinary dividends or distributions of property to the stockholders.  In no case (except due to an adjustment referred to above or any repricing that may be approved by our stockholders) will any adjustment be made to a stock option or stock appreciation right award under the 2012 Plan (by amendment, cancellation and regrant, exchange or other means) that would constitute a repricing of the per-share exercise or base price of the award.

Generally, and subject to limited exceptions set forth in the 2012 Plan, if we dissolve or undergo certain corporate transactions such as a merger, business combination or other reorganization, or a sale of all or substantially all of our assets, all awards then-outstanding under the 2012 Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the plan administrator provides for the assumption, substitution or other continuation of the award.  The plan administrator also has the discretion to establish other change-in-control provisions with respect to awards granted under the 2012 Plan.  For example, the administrator could provide for the acceleration of vesting or payment of an award in connection with a corporate event that is not described above and provide that any such acceleration shall be automatic upon the occurrence of any such event.

Our board of directors may amend or terminate the 2012 Plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant.  Plan amendments will be submitted to stockholders for their approval as required by applicable law or any applicable listing agency.  The 2012 Plan is not exclusive – our board of directors and compensation committee may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.

The 2012 Plan will terminate on November 16, 2022.  However, the plan administrator will retain its authority until all outstanding awards are exercised or terminated.  The maximum term of options, stock appreciation rights and other rights to acquire common stock under the 2012 Plan is ten years after the initial date of the award.

Employee Stock Purchase Plan.  On November 16, 2012, we adopted the Employee Stock Purchase Plan, or the Purchase Plan, to provide an additional means to attract, motivate, retain and reward employees and other eligible persons by allowing them to purchase additional shares of our common stock.  Our stockholders approved the plan on or about November 22, 2012. The below summary of the Purchase Plan is what we expect the terms of offerings under the plan to be.

The Purchase Plan is designed to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of our common stock, at semi-annual intervals, with their accumulated payroll deductions.

Share Reserve.  A total of 500,000 shares of our common stock will initially be available for issuance under the Purchase Plan.  The share limit will automatically increase on the first trading day in January of each year (commencing with January 2014) by an amount equal to lesser of (i) 1% of the total number of outstanding shares of our common stock on the last trading day in December in the prior year, (ii) 500,000 shares, or (iii) such lesser number as determined by our board of directors.

Offering Periods.  The Purchase Plan will operate as a series of offering periods. Offering periods will be of six months’ duration unless otherwise provided by the plan administrator, but in no event less than three months or longer than 27 months. The timing of the initial offering period under the plan will be established by the plan administrator.

Eligible Employees.  Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the start date of that period.  Employees may participate in only one offering period at a time.
 
 
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Payroll Deductions; Purchase Price.  A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date.  Unless otherwise provided in advance by the plan administrator, the purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date.  The number of shares a participant may purchase under the Purchase Plan is subject to certain limits imposed by the plan and applicable tax laws.

Change in Control.  If we are acquired by merger or sale of all or substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised on or prior to the effective date of the acquisition, unless the plan administrator provides for the rights to be settled in cash or exchanged or substituted on the transaction.  Unless otherwise provided in advance by the plan administrator, the purchase price will be equal to 85% of the market value per share on the start date of the offering period in which the acquisition occurs or, if lower, 85% of the fair market value per share on the purchase date.

Other Plan Provisions.  No new offering periods will commence on or after November 16, 2032.  Our board of directors may at any time amend, suspend or discontinue the Purchase Plan. However, certain amendments may require stockholder approval.

Director Compensation

Messrs. Caudill, Munro and Sullivan were appointed to our board of directors in December 2011.  None of our directors received any compensation for their services as directors during 2011 or 2012.  Messrs. Caudill, Munro and Sullivan were each employed by us in the years ended December 31, 2012 and 2011.  Their compensation for those years is described above under “Executive Compensation.”

In November 2012, our board of directors approved a new compensation policy for members of the board who are not employed by us or any of our subsidiaries (“non-employee directors”).  The policy became effective on January 1, 2013.  Under the policy, each non-employee director continuing to serve in such capacity after an annual meeting of our stockholders will receive an award of restricted stock units, with the number of units to be determined by dividing $30,000 by the per-share closing price of our common stock on the grant date.  A non-employee director who is appointed to the board after the date of the first annual meeting that occurs after January 1, 2013 (other than in connection with an annual meeting and who has not been employed by us or one of our subsidiaries in the preceding six months) will receive a grant of restricted stock units, with the number of units to be determined by dividing $30,000 by the per-share closing price of our common stock on the grant date and prorating that number based on the period of time that has elapsed since the last annual meeting.  Each of these grants will vest on a quarterly basis through the date of the next annual meeting (or, if earlier, the first anniversary of the date of grant).  A non-employee director who is appointed to the board prior to the date of the first annual meeting that occurs after January 1, 2013 will be eligible to receive an equity award as determined by the board of directors in its discretion.

In addition, our director compensation policy provides that a non-employee director who serves as Chairman of the Board will receive an annual cash retainer of $35,000.  A non-employee director who serves on our Audit Committee will receive an annual cash retainer of $20,000, a non-employee director who serves on our Compensation Committee will receive an annual cash retainer of $10,000, and a non-employee director who serves on our Governance and Nominating Committee will receive an annual cash retainer of $10,000.  Non-employee directors also are entitled to receive a fee of $1,500 for each meeting of the board or a board committee that they attend in person (with the director being entitled to one meeting fee if meetings of the board and a board committee are held on the same day). We also reimburse our non-employee directors for their reasonable travel expenses incident to attending meetings of our board or board committees.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 2012, we did not have a separately-designated compensation committee of our board of directors. Each of our directors participated in the determination of executive compensation.

ITEM 12.    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND   RELATED  STOCKHOLDERS MATTERS

The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 28, 2013 by:
 
 
each person known by us to be a beneficial owner of more than 5% of our outstanding common stock;
 
 
each of our directors;
 
 
each of our named executive officers; and
 
 
all directors and executive officers as a group.
 
 
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        The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Securities and Exchange Commission, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security.  A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after, March 28, 2013.  Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest.  Except as indicated by footnote, to our knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

In the table below, percentage of ownership of our common stock is based on 2,799,565 shares of common stock outstanding as of March 28, 2013.   Unless otherwise noted below, the address of the persons listed on the table is c/o InterCloud Systems, Inc., 2500 N. Military Trail, Suite 275, Boca Raton, Florida 33431.
 
 
Common Stock Beneficially Owned
Name of Beneficial Owner
Number
 
Percentage
 
Executive Officers and Directors
       
Mark Munro(1)
2,266,914
   
44.8
%
Mark F. Durfee(2)
3,075,151
   
52.6
%
Charles K. Miller(3)
110,886
   
3.8
%
Neal Oristano(4)
207,734
   
6.9
%
Daniel J. Sullivan
   
 
Lawrence B. Sands
37,318
     
*
Roger Ponder
   
 
All named executive officers and directors as a group
5,698,003
   
67.6
%
5% or More Stockholders
         
Forward Investment LLC(5)
3,352,463
   
54.5
%
Mark Munro 1996 Charitable Remainder Trust(6)
304,308
   
9.8
%
Great American Life Insurance Company(7)
524,679
   
15.8
%
Great American Insurance Company(8)
224,863
   
8.0
%
UTA Capital LLC(9)
225,355
   
8.0
%
___________
 
 
*  Less than 1.0%.
 
(1)
Includes (i) 9,960 shares of common stock, and (ii) 2,256,954 shares of common stock issuable upon conversion of 10,004 shares of Series B Preferred Stock held by Mr. Munro.  Does not include shares attributable to shares held by the Mark Munro 1996 Charitable Remainder Trust separately set forth herein because Mark Munro does not have shared or sole voting or dispositive power over this irrevocable trust.

(2)
Includes (i) 26,996 shares of common stock, and (ii) 3,048,155 shares of common stock issuable upon conversion of 12,566 shares of Series B Preferred Stock held by Mr. Durfee.
 
(3)
Includes (i) 23,065 shares of common stock issuable upon conversion of 25 shares of Series E Preferred Stock, (ii) 11,744 shares of common stock issuable upon exercise and conversion of a Series E warrant, and (iii) 76,077 shares of common stock issuable upon conversion of 263 shares of Series B Preferred Stock held by Mr. Miller.
 
(4)
Includes (i) 138,117 shares of common stock issuable upon conversion of 50 shares of Series C Preferred Stock, (ii) 46,977 shares of common issuable upon conversion of 50 shares of Series E Preferred Stock, and (iii) 23,488 shares of common issuable upon exercise to a Series E warrant held by Mr. Oristano.
 
(5)
Includes 3,352,463 shares of common stock issuable upon conversion of 13,616 shares of Series B Preferred Stock held by Forward Investment LLC, which shares are beneficially owned by Douglas Shooker.
 
(6)
Includes 304,870 shares of common stock issuable upon conversion of 1,051 shares of Series B Preferred Stock held by Mark Munro 1996 Charitable Remainder Trust.
 
(7)
Includes 524,679 shares of common stock shares issuable upon exercise of a warrant held by Great American Life Insurance Company.  The board of directors of Great American Life Insurance Company shares voting and investment control over these shares.
 
(8)
Includes 224,863 shares of common stock shares issuable upon exercise of a warrant held by Great American Insurance Company. The board of directors of Great American Insurance Company shares voting and investment control over these shares.
 
(9)
The shares of common stock held of record by UTA Capital LLC are beneficially owned by Udi Toledano.
 
 
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ITEM 13.  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Procedures for Approval of Related Party Transactions

A “related party transaction” is a transaction, arrangement or relationship in which we or any of our subsidiaries was, is or will be a participant, and which involves an amount exceeding $120,000, and in which any related party had, has or will have a direct or indirect material interest.  A “related party” includes
 
 
any person who is, or at any time during the applicable period was, one of our executive officers or one of our directors;
 
 
any person who beneficially owns more than 5% of our common stock;
 
 
any immediate family member of any of the foregoing; or
 
 
any entity in which any of the foregoing is a partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest.
 
Our board of directors plans to adopt a written related party transactions policy.  Pursuant to this policy, our board of directors, likely by a corporate governance and nominating committee of our board of directors which may also be formed, will review all material facts of all related party transactions and either approve or disapprove entry into the related party transaction, subject to certain limited exceptions.  In determining whether to approve or disapprove entry into a related party transaction, our directors and corporate governance committee shall take into account, among other factors, the following: (i) whether the related party transaction is on terms no less favorable to us than terms generally available from an unaffiliated third-party under the same or similar circumstances, (ii) the extent of the related party’s interest in the transaction and (iii) whether the transaction would impair the independence of a non-employee director.

Related Party Transactions

The following transactions were entered into prior to the adoption of the approval procedures described above.

Sale of Interest in Digital Comm.  On September 13, 2012, pursuant to a Purchase and Sale Agreement dated July 30, 2012, we sold 60% of the outstanding shares of common stock of Digital, one of our subsidiaries, to Billy Caudill, a director and our President at that time, in consideration of the issuance to us by Mr. Caudill of a non-recourse promissory note in the principal amount of $125,000.  The promissory note bears no interest except following an event of default, in which case it bears interest at the rate of 18% per annum, matures on September 13, 2013 and is secured by the purchased shares of Digital.

In connection with the sale, (i) we agreed to use our best efforts to secure additional financing or lines of credit to support the business of Digital, (ii) it was agreed that all of Digital’s future work would be offered to us to perform on a subcontract basis, (iii) it was agreed that the 40% interest we retained in Digital will be non-dilutable, and (iv) we are to be paid 5% of the cash receipts of Digital, up to a maximum of $50,000 annually, for accounting and administrative support services for Digital.

Loan Transactions.  On July 5, 2011, we entered into a definitive master funding agreement with Tekmark Global Solutions, LLC, of which our director, Charles K. Miller, is the chief financial officer.  Pursuant to the agreement, we received financing in the original principal amount of up to $2,000,000 from Tekmark and a line of credit in the original principal amount of up to $1,000,000 from MMD Genesis LLC, a company in which Mr. Munro is a principal.  The Tekmark funding was secured by our accounts receivable. Funding by Tekmark had been in the form of payroll funding support for specific and approved customers of Digital.  At December 31, 2012, this loan had been repaid in full.

Series B Preferred Stock Financing.  Between July 2011 and December 2012, we sold an aggregate of 37,500 shares of our Series B Preferred Stock for an aggregate purchase price of $2,216,760 to certain of our existing stockholders that qualified as “accredited investors” within the meaning of the Securities Act, including certain of our affiliates.  Forward Investment LLC, which owns more than 5% of our outstanding capital stock, purchased 13,615 shares for a purchase price of $825,000.  Mark Munro 1996 Charitable Remainder Trust, which owns more than 5% of our outstanding capital stock, purchased 1,051 shares for a purchase price of $100,000.  Additionally, our Chief Executive Officer, Mark Munro, purchased 7,902 shares for a purchase price of $469,460, Charles Miller, a director, purchased 263 shares for a purchase price of $25,000 and Mark Durfee, a director, purchased 12,566 shares for a purchase price of $725,000. 
 
 
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Series C Preferred Stock Financing.  Between January 2012 and July 2012, we sold an aggregate of 1,500 shares of our Series C Preferred Stock at $1,000 per share for an aggregate purchase price of $1,500,000.  These sales were made to “accredited investors” within the meaning of the Securities Act, including certain of our affiliates.  A company owned by our Chief Executive Officer, Mark Munro, purchased 75 shares for a purchase price of $75,000 and Neal Oristano, a director, purchased 50 shares for a purchase price of $50,000.

Issuance of Series D Preferred Stock.  In July 2012, we issued to Billy Caudill, a director of our company and our President at that time, 400 shares of our Series D Preferred Stock, which shares were valued at $400,000, in consideration of a pledge by Mr. Caudill of his home to secure a third-party loan made to Digital.  On November 20, 2012, Mr. Caudill converted all of his shares of Series D Preferred Stock into 128,000 shares of our common stock.

Series E Preferred Stock Financing.  Between September 2011 and February 2013, we sold an aggregate of 2,825 shares of our Series E Preferred Stock at $1,000 per share for an aggregate purchase price of $2,825,000. These sales were made to “accredited investors” within the meaning of the Securities Act, including certain of our affiliates.  Charles K. Miller, a director, purchased 25 shares for a purchase price of $25,000 and a company owned by our Chief Executive Officer, Mark Munro, purchased 25 shares for a purchase price of $25,000.

Independence of the Board of Directors

Our board of directors consists of four members:  Messrs. Mark Munro, Mark Durfee, Charles Miller and Neal Oristano.  Our board of directors determined that all of the members of our board of directors, except our chief executive officer, Mr. Munro, are “independent directors” as defined in applicable rules of the SEC and NASDAQ.  All directors will hold office until their successors have been elected. Officers are appointed and serve at the discretion of our board of directors.  
 
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Audit Fees
 
The aggregate fees billed by BDO USA, LLP, our principal accountants for the year ended December 31, 2012, for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K, for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q, and for services in connection with statutory and regulatory filings or engagements were approximately $375,000 and $0 for the fiscal years ended December 31, 2012 and 2011, respectively.
 
The aggregate fees billed by Sherb & Co., LLP, our principal accountants for the year ended December 31, 2011, for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K, for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q, and for services in connection with statutory and regulatory filings or engagements were approximately $70,000 and $70,000 for the fiscal years ended December 31, 2012 and 2011, respectively.
 
 Audit-Related Fees
 
We did not engage BDO USA, LLP for audit-related services in the fiscal years ended December 31, 2012 and 2011.
 
The aggregate fees billed by Sherb & Co., LLP for audit-related services were approximately $204,633 and $0 for the fiscal years ended December 31, 2012 and 2011, respectively. The fees billed by Sherb & Co., LLP were audit-related fees with respect to our targeted and completed acquisitions.
 
Tax Fees
 
The aggregate fees billed by BDO USA, LLP for tax-related services was $25,000 and $0 for the fiscal years ended December 31, 2012 and 2011, respectively. 
  
All Other Fees
 
Other than as reported above, we did not engage our principal accountants to render any other services to us during the last two fiscal years.
 
 
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PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibits

The exhibits required by this item are listed on the Exhibit Index attached hereto.

Financial Statements

The financial statements of the Company and Reports of Independent Registered Public Accounting Firms are presented in the “F” pages following this report after the “Index to Financial Statements” attached hereto.
 
 
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:  April 1, 2013
 
 
By: /s/ Mark Munro
 
Name: Mark Murno
 
Title: Mark Munro
   

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
         
/s/ Mark Munro   
 
Chief Executive Officer and Chairman of the Board of Directors
 
April 1, 2013
Mark Munro
 
(Principal Executive Officer)
   
         
/s/ Daniel Sullivan 
 
Chief Financial Officer
 
April 1, 2013
Daniel Sullivan
 
(Principal Financial Officer and Principal Accounting Officer)
   
         
/s/ Mark Durfee
 
Director
 
April 1, 2013
Mark Durfee
       
         
/s/ Charles K. Miller
 
Director
 
April 1, 2013
Charles K. Miller
       
         
/s/ Neal L. Oristano
 
Director
 
April 1, 2013
Neal L. Oristano
 
       
 
 
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EXHIBIT INDEX

Exhibit
Number
 
Description of Document 
     
2.1
 
Stock Purchase Agreement, dated as of January 14, 2010, between Digital Comm, Inc. and the Company (incorporated by reference to Exhibit 2.1 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.2†
 
Stock Purchase Agreement, dated as of November 15, 2011, between Margarida Monteiro, Carlos Monteiro and the Company (incorporated by reference to Exhibit 2.2 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.3
 
Amendment to Stock Purchase Agreement, dated as of December 14, 2011, between Margarida Monteiro, Carlos Monteiro and the Company (incorporated by reference to Exhibit 2.3 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.4†
 
Stock Purchase Agreement, dated as of August 15, 2011, between William DeVierno and the Company (incorporated by reference to Exhibit 2.4 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.5†
 
Stock Purchase Agreement, dated as of September 17, 2012, between T N S, Inc., Joel Raven and Michael Roeske and the Company (incorporated by reference to Exhibit 2.5 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.6†
 
Equity Purchase Agreement, dated as of September 17, 2012, between ADEX Corporation, ADEXCOMM Corporation, ADEX Puerto Rico, LLC, Peter Leibowitz, Gary McGuire, Marc Freedman and Justin Leibowitz and the Company (incorporated by reference to Exhibit 2.6 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.7†
 
Asset Purchase Agreement, dated as of November 19, 2012, between Tekmark Global Solutions, LLC and the Company (incorporated by reference to Exhibit 2.7 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.8†
 
Stock Purchase Agreement dated as of November 20, 2012, by and among Integration Partners-NY Corporation, Bart Graf, David Nahabedian, and Frank Jadevaia and the Company (incorporated by reference to Exhibit 2.8 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
2.9
 
Equity Purchase Agreement dated as of November 30, 2012 among ADEX Corporation, Environmental Remediation and Financial Services, LLC and Mark Vigneri (incorporated by reference to Exhibit 2.9 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed with the SEC on March 26, 2013).
     
3.1
 
Certificate of Incorporation of the Company, as amended by the Certificate of Amendment dated August 16, 2001 and the Certificate of Amendment dated September 4, 2008,  filed in the office of the Secretary of State of the State of Delaware on September 3, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.2
 
Series A Certificate of Designation filed with the Delaware Secretary of State on July 11, 2011 (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.3
 
Series B Certificate of Designation filed with the Delaware Secretary of State on June 28, 2011 (incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.4
 
Series C Certificate of Designation filed with the Delaware Secretary of State on January 10, 2012 (incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.5
 
Series D Certificate of Designation filed with the Delaware Secretary of State on March 5, 2012 (incorporated by reference to Exhibit 3.5 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
 
 
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3.6
 
Series E Certificate of Designation filed with the Delaware Secretary of State on September 18, 2012 (incorporated by reference to Exhibit 3.6 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.7
 
Series F Certificate of Designation filed with the Delaware Secretary of State on September 17, 2012 (incorporated by reference to Exhibit 3.7 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.8
 
Series G Certificate of Designation filed with the Delaware Secretary of State on September 17, 2012 (incorporated by reference to Exhibit 3.8 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.9
 
Amendment No. 1 to Series B Certificate of Designation filed with the Delaware Secretary of State on October 23, 2012 (incorporated by reference to Exhibit 3.9 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.10
 
Series H Certificate of Designation filed with the Delaware Secretary of State on November 16, 2012 (incorporated by reference to Exhibit 3.10 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
3.11
 
Series I Certificate of Designation filed with the Delaware Secretary of State on December 6, 2012 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on December 6, 2012).
     
3.12
 
Certificate of Amendment dated January 10, 2013 to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.12 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed with the SEC on March 26, 2013).
     
3.13
 
Amended and Restated Bylaws of the Company, dated as of November 16, 2012 (incorporated by reference to Exhibit 3.12 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
4.2
 
Promissory Note, dated September 17, 2012, of the Company issued to Wellington Shields & Co (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.1
 
2012 Performance Incentive Plan (incorporated by reference to Exhibit A to the Company’s Information Statement filed with the SEC on December 17, 2012 (File No. 000-32037).
     
10.3
 
Form of Indemnification Agreement with Executive Officers and Directors (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.4
 
Director Compensation Policy (incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.5
 
Employee Stock Purchase Plan (incorporated by reference to Exhibit B to the Company’s Information Statement filed with the SEC on December 17, 2012 (File No. 000-32037).
     
10.6
 
Executive Employment Agreement, dated as of September 1, 2009, between Gideon Taylor and the Company (incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.7
 
Executive Employment Agreement, dated as of January 16, 2010, between Billy Caudill and the Company (incorporated by reference to Exhibit 10.7 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.8
 
Executive Employment Agreement, dated as of January 18, 2010, between Lawrence Sands and the Company (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.9
 
Amendment to Executive Employment Agreement, dated November 29, 2010, between Billy Caudill and the Company (incorporated by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
 
 
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10.10
 
Amendment to Executive Employment Agreement, dated November 29, 2010, between Gideon Taylor and the Company (incorporated by reference to Exhibit 10.10 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.11
 
Purchase and Sale Agreement, dated as of July 30, 2012, between Billy Caudill and the Company (incorporated by reference to Exhibit 10.11 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.12
 
Stock Purchase Agreement, dated as of September 6, 2012,  between the Company and UTA Capital, LLC (incorporated by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.13
 
Promissory Note, dated as of September 13, 2012, issued by Billy Caudill to the Company (incorporated by reference to Exhibit 10.13 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.14
 
Loan and Security Agreement, dated as of September 17, 2012, among and the Company, Rives-Monteiro Leasing, LLC, Tropical Communications, Inc., the lenders party thereto and MidMarket Capital Partners, LLC, as agent (incorporated by reference to Exhibit 10.14 of the Company’s Registration Statement on Form S-1 (Registration No. 33-185293) filed with the SEC on December 5, 2012).
     
10.15
 
Guaranty and Suretyship Agreement, dated as of September 17, 2012, among Rives-Monteiro Leasing, LLC and Tropical Communications, Inc. in favor of MidMarket Capital Partners, LLC,